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Annual
wort
1981

Board of Governors of the Federal Reserve System



Letter of Transmittal

BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Washington, D.C., April 15, 1982

THE SPEAKER OF
THE HOUSE OF REPRESENTATIVES

Pursuant to the requirements of section 10 of the Federal Reserve Act, I am
pleased to submit the Sixty-Eighth Annual Report of the Board of Governors
of the Federal Reserve System.
This report covers operations of the Board during calendar year 1981.

Sincerely,
Paul A. Volcker, Chairman




Contents
Part 1
3
4
6
7
8
9
10

Monetary Policy and the
U.S. Economy in 1981

INTRODUCTION
THE ECONOMY IN 1981
Household sector
Business sector
Government sector
Labor market developments
Prices

12 MONETARY POLICY AND FINANCIAL MARKETS
13 Monetary aggregates and interest rates
19 Aggregate flows of funds
23 INTERNATIONAL DEVELOPMENTS
24 Current account balance
24 Capital transactions
26 Operations in foreign currencies
28 MONETARY POLICY REPORTS TO CONGRESS
28 Report on February 25, 1981
46 Report on July 20, 1981




Part 2

Records, Operations,
and Organization

65 RECORD OF POLICY ACTIONS—BOARD OF GOVERNORS
65 Regulation C (Home Mortgage Disclosure)
65 Regulation D (Reserve Requirements of Depository Institutions)
67 Regulation D (Reserve Requirements of Depository Institutions)
and Regulation Q (Interest on Deposits)
69 Regulation E (Electronic Fund Transfers)
69 Regulation F (Securities of Member State Banks)
69 Regulation J (Collection of Checks and Other Items and
Wire Transfers of Funds)
70 Regulation K (International Banking Operations)
71 Regulation M (Consumer Leasing) and Regulation Z (Truth in Lending)
72 Regulation Q (Interest on Deposits)
73 Regulation T (Credit by Brokers and Dealers)
73 Regulation Y (Bank Holding Companies and Change in Bank Control)
74 Regulation Z (Truth in Lending)
74 Policy statements and other actions
76 1981—Discount rates
84
84
86
87
89
90
98
108
113
121
128
134
140

RECORD OF POLICY ACTIONS—FEDERAL OPEN
MARKET COMMITTEE
Authorization for domestic open market operations
Domestic policy directive
Authorization for foreign currency operations
Foreign currency directive
Meeting held on February 2-3, 1981
Meeting held on March 31, 1981
Meeting held on May 18, 1981
Meeting held on July 6-7, 1981
Meeting held on August 18, 1981
Meeting held on October 5-6, 1981
Meeting held on November 17, 1981
Meeting held on December 21-22, 1981

147
148
148
153
156
157

CONSUMER AND COMMUNITY AFFAIRS
Educational activities
Truth in Lending
Equal Credit Opportunity
Home Mortgage Disclosure
Federal Trade Commission Act




161
161
161
161
162

LEGISLATIVE RECOMMENDATIONS
Reserve requirements on money market mutual funds
Exemption of smaller institutions from reserve requirements
Helping regulatory agencies to deal with ailing depository institutions
Amendments to Financial Institutions Regulatory and
Interest Rate Control Act of 1978
163 Financial transactions with affiliates
163 Expansion of Class C directors
163 Amendments to the International Banking Act
165 LITIGATION
165 Bank holding companies—Antitrust action
—Review of Board actions
168 Other litigation involving challenges to Board procedures and regulations
175
175
175
175
176
177
177
177
177
178
178

LEGISLATION ENACTED
Increases in debt ceiling
Cash Discount Act
International Investment Survey Act of 1976
Economic Recovery Tax Act of 1981
Defense Production Act and Gold Commission
Overseas Private Investment Corporation Amendment Act of 1981
George Washington Commemorative Coin Act
Farm Credit Administration
International banking facilities
Social security

180
180
185
190

BANKING SUPERVISION AND REGULATION
Supervision for safety and soundness
Regulation of U.S. banking structure
Enforcement of other laws and regulations

194 REGULATORY SIMPLIFICATION
194 Progress during 1981
194 Board actions and staff work
199
199
201
201
202
203
203
203
204

FEDERAL RESERVE BANKS
Pricing of services
Developments in payments mechanism
Examination
Income and expenses
Federal Reserve Bank premises
Holdings of securities and loans
Loan guarantees for defense production
Volume and cost of operations




205 BOARD OF GOVERNORS
205 Financial statements
211 STATISTICAL TABLES
212
1. Detailed statement of condition of all Federal Reserve Banks combined,
December 31, 1981
214
2. Statement of condition of each Federal Reserve Bank, December 31, 1981
and 1980
218
3. Federal Reserve Bank holdings of U.S. government and federal agency
securities, December 31, 1979-81
221 4. Federal Reserve Bank holdings of special short-term Treasury certificates
purchased directly from the United States, 1972-81
222
5. Federal Reserve open market transactions, 1981
224
6. Income and expenses of Federal Reserve Banks, 1981
228
7. Income and expenses of Federal Reserve Banks, 1914-81
232
8. Bank premises of Federal Reserve Banks and Branches, December 31,
1981
233
9. Volume of operations in principal departments of Federal Reserve Banks,
1978-81
234 10. Principal operations of Federal Reserve Banks—Expense, ratio of expense
for each operation to total expenses, and average number of employees,
1978-81
234 11. Number and salaries of officers and employees of Federal Reserve Banks,
December 31, 1981
235 12. Federal Reserve Bank interest rates, December 31, 1981
235 13. Reserve requirements of depository institutions
238 14. Maximum interest rates payable on time and savings deposits at federally
insured institutions
240 15. Margin requirements
241 16. Principal assets and liabilities, and number of insured commercial banks,
by class of bank, June 30, 1981 and 1980
242 17. Reserves of depository institutions, Federal Reserve Bank credit, and
related items—Year-end, 1918-81, and month-end, 1981
246 18. Changes in number of banking offices in the United States, 1981
248 19. Mergers, consolidations, acquisitions of assets or assumptions of liabilities
approved by the Board of Governors, 1981
257 MAP OF FEDERAL RESERVE SYSTEM—DISTRICTS
260
262
263
264
265

FEDERAL RESERVE DIRECTORIES AND MEETINGS
Board of Governors of the Federal Reserve System
Federal Open Market Committee
Federal Advisory Council
Consumer Advisory Council
Federal Reserve Banks and Branches

289 INDEX




Part 1
Monetary Policy and
the U.S. Economy in 1981




Introduction
Economic activity in the United States
increased little on balance during
1981, extending the sluggishness that
began in 1979. Over this period,
growth in nominal gross national
product was constrained by the application of a monetary policy aimed at
damping deeply entrenched inflationary pressures. The rate of inflation,
which had increased in 1980, slowed
appreciably during the course of
1981. By year-end there were indications of more moderate wage and
price behavior that could permit sustained progress toward lower rates
of inflation in an environment of more
satisfactory economic performance.
The rebound in economic activity
that began in mid-1980 continued
into early 1981, but aggregate demand soon leveled out, and in the
final quarter of the year real gross
national product turned down sharply.
Payroll employment, which had been
rising moderately, declined in the
fourth quarter to a level only slightly
above that of a year earlier, and the
unemployment rate at year-end was
close to the highest since World
War II.
Abundant agricultural supplies,
combined with weak demand, caused
inflation in food prices to ease significantly in 1981. The stability of petroleum markets after the initial effect of
the decontrol of oil prices also contributed to a deceleration in the overall price level as the year progressed.
More fundamentally, the lengthening
period of economic slack began to



reduce rates of price increase in markets for many goods and services.
Damping of inflation and inflation
expectations continued to be the principal objective of monetary policy in
1981. To this end, the ranges established for the monetary aggregates by
the Federal Open Market Committee
provided for a slower expansion in
money and credit than in 1980. Over
the four quarters of 1981, growth of
the narrow money stock fell short of
its target range, but growth of the
broader measures exceeded the upper
ends of their ranges. These disparate
movements were attributable largely
to efforts by the public to trim holdings of narrow money, especially in
view of the increasing availability and
popularity of financial assets paying
market-related rates of interest and
included in the broader measures of
money.
Interest rates remained unusually
high and volatile in 1981. Short-term
rates were close to record levels at the
start of the year and, after a moderate
decline, returned to about those levels
in late spring. But as the economy
weakened and reserve positions eased,
short-term rates dropped sharply. In
contrast, long-term interest rates remained on a generally upward course
throughout the year, in large part reflecting continued concerns in financial markets about huge current and
prospective federal deficits and the
difficulties of achieving progress
against inflation in such circumstances.

The Economy in 1981
In 1981 the nation made substantial
progress in reversing the acceleration
of inflation. In the process, however,
production declined, and employment
posted disappointingly small gains.
The economy was expanding rapidly
as the year began, continuing the rebound from the 1980 recession. But
it began losing momentum as the year
progressed, and was contracting
sharply in the closing months of the
year. On balance, real gross national
product in the fourth quarter was only
about % percent higher than a year
earlier. Thus 1981 extended the
period of sluggish economic performance that began in 1979. Over this
span, anti-inflation policy confronted
the powerful upward momentum in
prices, and as nominal GNP growth
was constrained, little room was left
for increases in real activity. By the
end of 1981, however, mounting evidence suggested that the psychology
that had contributed to the persistence of inflation was diminishing in
intensity, and that higher unemployment and lower capacity utilization
were at last forcing a moderation in
wage- and price-setting decisions.
Sizable public and private demands for credit in 1981, occurring
in an environment of monetary restraint, were reflected in unusually
high interest rates. The high cost of
financing exerted disproportionate
strains on those sectors of the economy in which spending is heavily reliant on credit. Homebuilding, state
and local construction, and consumer
durable goods were comparatively
weak in 1981. The only component
of aggregate demand that grew rapidly




was federal purchases of goods and
services.
Industrial production rose slightly
during the first half of 1981, but fell
nearly 7 percent between July and
December. Decreases were particularly large in the output of construction supplies and of consumer durable
goods; in contrast, production of defense and space equipment continued
to expand. The widespread declines
in overall production caused capacity
utilization rates for both manufacturing and materials to fall to about 73
percent by December, the lowest
levels since 1975.
The continued sluggishness of economic growth limited the demand for
labor, and job gains were meager in
1981. Nonfarm employment rose
moderately through the first three
quarters of 1981, but heavy job losses
in the fourth quarter left payrolls at
year-end only 150,000 higher than
they were at the end of 1980. The
trade and service sectors accounted
for most of this increase; employment
declined in manufacturing and construction, falling by December to
levels below the 1980 trough. Over
the year as a whole, the rise in total
employment did not keep pace with
the expansion of the labor force, even
though the number of new job seekers
rose much more slowly than during
the 1970s. Consequently, the unemployment rate, after declining slightly
through the first half of 1981, rose
steadily through most of the second
half and by December reached 8.8
percent, fractionally below its 1975
postwar high.
Inflation slowed noticeably in 1981.

The Economy in 1981

5

Indicators of Economic Performance
Percentage change, Q4 to Q4
Real

Ratio

(i\P

' final sales

Index, 1967=100

Millions of units
Housing starts

1975

1977

1979

1981

All data are seasonally adjusted at annual rates. The industrial production index
(monthly) is Federal Reserve data; the unemployment rate (monthly) and the change
in unit labor costs are U.S. Department of
Labor data; auto sales are from the Motor
Vehicle Manufacturers' Association. All other
data are from the U.S. Department of Commerce. Real GNP and real final sales are in



1975

1977

1979

1981

terms of 1972 dollars. The inventory-sales
ratio is based on real (1972 dollars) manufacturing and total trade sales and inventories.
Prices are measured by the fixed-weight price
index for gross domestic purchases (1972
weights); percentage change is from four
quarters earlier. Unit labor costs are for the
nonfarm business sector; percentage change is
from four quarters earlier.

6

The Economy in 1981

Early in the year, the signs of more
moderate increases in prices were
confined to a few markets, particularly those in which prices are highly
sensitive to changing economic conditions. But as time passed, a broader
deceleration became evident. By midyear, price increases for a wide range
of consumer goods had dropped far
below the double-digit pace of 1979
and 1980; further progress was made
in the second half when price inflation in the capital goods sector also
slowed. Surveys of consumer attitudes suggested that expectations
about inflation in the near term were
beginning to improve. With the pace
of inflation slackening, inflation expectations moderating, and employers
hesitant to increase hiring, wage increases also began to moderate in
1981. Nominal wage gains were
smaller than those in 1980; moreover,
wage concessions by workers became
widespread toward year-end, and as
1982 began, the stage seemed set for
a moderation in wage demands.

services, continued to rise despite a
marked deceleration in food and gasoline prices.
In real terms, aggregate personal
consumption expenditures increased
about 1 percent last year, even
less than the rise in real disposable
income. Households cut back spending on a wide range of discretionary
items, such as furniture, appliances,
and recreation equipment, but their
cautious spending behavior was most
evident in automobile purchases.
Domestic producers last year sold
only 6.2 million cars, the lowest figure in two decades. Cash rebates,
below-market interest rates, and other
sales incentive programs induced a
brisker selling pace early in the year
and again in the third quarter. But
these increases were followed by extremely poor sales in the second and
fourth quarters, when most programs
were removed. In contrast to domestic sales, sales of imported cars held
up quite well. About 2.3 million foreign cars were bought, only 4 percent
less than in 1980; they accounted for
a record 27 percent of the auto market.

Household Sector
Personal consumption expenditures,
which account for about two-thirds
Saving
of GNP, were constrained last year Income, Consumption, andchange, Q4 to Q4
Percentage
by the weakness in real income
8
growth. Even with the personal in- Real consumption o , ,. u l .
i
Real disposable income
| l
come tax cuts in the fourth quarter,
real disposable income rose only
about 2 percent during 1981, marking the third consecutive year of sluggish growth.1 At the same time, the
share of household budgets absorbed
by basic necessities, such as food,
energy, and other essential goods and
1. Throughout the discussion of "The
Economy in 1981," annual figures represent changes from the fourth quarter of
1980 to the fourth quarter of 1981 unless
Digitized indicated otherwise.
for FRASER


£L

1975

1977

1979

1981

Based on U.S. Department of Commerce
data, seasonally adjusted at annual rates. Real
consumption and real disposable income are
in terms of 1972 dollars.

Expenditures in real terms on residential construction fell 22 percent
last year. By the fourth quarter, outlays were nearly 40 percent below the
peak level in early 1978, making the
downturn the longest in the postwar
period and, by many measures, the
most severe. Total housing starts
averaged 1.1 million units in 1981.
As interest rates for new mortgage
commitments peaked at a new high
in October, starts tumbled to an annual rate of 900,000 units during the
final quarter. These annual and
quarterly levels were the lowest since
1946. However, near the end of the
year there were indications that activity and sales were stabilizing.
The decline in homebuilding activity was particularly sharp in the
single-fanprily sector, which accounts
for around two-thirds of the housing
market. Single-family starts fell
around 45 percent to the lowest level
on record, paralleling a sharp decline
in home sales. During the autumn,
sales of new homes were at their slowest pace since the beginning of data
collection in 1963, and sales of existing homes set a 10-year low.
Construction in the multifamily
sector declined about 33 percent in
1981 even though sustained demand
for condominiums and cooperatives,
typically offered at lower prices than
detached homes, provided some support. But subsidized rental construction (under the section 8 program
administered by the Department of
Housing and Urban Development)
fell to about half of its 1980 total.
Building of nonsubsidized rental units
also was quite weak in 1981 as high
credit costs and longer-run uncertainties about profitability continued
to depress this market.
The slowdown in real estate marDigitizedkets was reflected in a marked decelfor FRASER


The Economy in 1981

7

eration in home prices. The recorded
average prices of new and existing
homes sold during 1981 rose only
4 or 5 percent. For the first time
since 1974, measured prices of existing homes sold were up less than
overall prices. Moreover, the concessionary financing involved in many
sales was not reflected by available
price measures. Adjusting for the
effects of such financing, average
home prices may not have increased
at all last year, and in some regions
prices actually may have declined.
Business Sector
Business fixed investment adjusted
for inflation increased 3 percent during 1981. Despite this gain, by the
final quarter of the year, capital
spending was still 2% percent below its peak in the third quarter of
1979. The weakness over the past
two years can be traced in part to
the stagnation in real final sales,
which resulted in extensive and growing underutilization of capacity and
a sharp decline in profits. In addition, the real cost of capital rose because of the upward trend in corporate bond rates.
Business purchases of equipment
rose fractionally in real terms last
year after a decline of almost 4 percent during 1980. Outlays for electrical machinery and transportation
equipment, particularly cars and
trucks, fell during 1981, while purchases of other equipment increased
slightly. In contrast, spending on
nonresidential structures, especially
for commercial and industrial building and for petroleum drilling, continued to hold up relatively well, increasing 8% percent in real terms
during the year.
Forward-looking indicators suggest
that the weakness in capital spending

8

The Economy in 1981

is likely to continue in 1982. Contracts and orders for plant and equipment in real terms declined throughout most of 1981; the fourth-quarter
level was about 4 percent below that
of a year earlier. In addition, surveys of spending plans suggested that
capital outlays in real terms for calendar year 1982 would be little
changed from 1981.
Responding to high carrying costs
and weak sales, firms attempted to
keep inventories on the lean side last
year. Nonetheless, widespread involuntary accumulation occurred in the
second half as the economy softened.
Constant dollar inventory-to-sales ratios in most industries approached,
and in some cases exceeded, the highs
of 1975. Seeking to curtail excess
stockbuilding, firms cut production
substantially in the last four months
of the year. The sizable liquidation
of total manufacturing and trade inventories in December indicated that
the adjustment of stocks to the reduced level of sales was under way.
Government Sector
Total government purchases of goods
and services in real terms rose 2 percent during 1981. However, advance
in the total masks widely divergent
movements between its two sectors.
On the one hand, federal purchases
increased rapidly; on the other, state
and local spending fell, in marked
departure from its past trend.
Federal tax receipts increased only
9V4 percent last year, about 2 percentage points less than during 1980
primarily as a consequence of the
weakness in economic activity and
provisions of the Economic Recovery
Tax Act of 1981. Corporate tax
accruals declined sharply because of
the fall in profits and the new provi


sions for accelerated depreciation, and
indirect business taxes rose at only
one-third the pace of 1980. Growth of
personal income tax receipts was curtailed by the 5 percent reduction in
income tax withholdings in the fourth
quarter. On the other hand, contributions for social insurance accelerated
sharply, pushed by increases in both
the tax rate and the tax base for social
security.
Total federal government expenditures in nominal terms grew about
13Vi percent last year compared with
19 percent in 1980. National defense purchases rose rapidly, as did
outlays for the Strategic Petroleum
Reserve and agricultural support programs. Spending for other nondefense programs was reduced. Net interest payments increased nearly 45
percent during 1981 primarily because of the high level of interest
rates and the large deficits in fiscal
years 1980 and 1981. Transfer payments grew less rapidly than during
1980, while grants to state and local
governments decreased 9 percent
over the year. With expenditures
growing more rapidly than receipts
in 1981, the deficit, as measured by
the national income and product accounts, widened to about $100 billion
at an annual rate in the final quarter.
Responding to the reductions in
federal assistance, state and local
governments curtailed their spending
last year. In addition, growth of
own-source revenues slowed as a result of lower profits-tax receipts and
a smaller advance in personal taxes.
State and local purchases of goods
and services fell 2 percent in real
terms; they had risen 3 percent per
year on average during the 1970s.
Payroll employment dropped substantially because of the termination
of the federally funded public service

The Economy in 1981
Real Government Purchases of
Goods and Services
Percentage change

Federal
! | State and
-I I f""! local

1977
1975
1979
1981
Based on U.S. Department of Commerce
data, seasonally adjusted at annual rates. Real
purchases are in terms of 1972 dollars. Percentage change is from fourth quarter to
fourth quarter.

employment program under the Comprehensive Employment and Training
Act. By year-end, most state governments had imposed hiring freezes.
Construction spending, adjusted for
inflation, fell to its lowest level in
25 years. In the last quarter of 1981
the sector's operating budget (total
surplus excluding social insurance
funds) recorded a small surplus.
Labor Market Developments
Continuing its rebound from the mid1980 recession, employment expanded during the first three quarters
of 1981. Most of the hiring was concentrated in services and trade. With
demand subsiding and industrial activity slowing, employment growth in
the goods-producing sector slackened
and then began to turn down after
midyear. In the final quarter of the
year, declines in industry employment
became widespread as businesses
acted to bring production in line with
sales. On balance, total nonfarm employment at the end of 1981 was just
X
A percent above the level one year
earlier and only 3A percent above the
level at the end of 1979.

Employment
http://fraser.stlouisfed.org/ in the goods-producFederal Reserve Bank of St. Louis

9

ing sector recovered a bit in late 1980
and early 1981, but not enough to
make up the losses during the 1980
recession. Construction employment
peaked in April at 150,000 below its
1980 high, and the 1981 peak for
manufacturing jobs in July was more
than one-half million below the level
two years earlier. Factory employment started to edge off in August,
and large cutbacks began in October.
Layoffs in the cyclically sensitive durable goods industries accounted for
about two-thirds of the decline in
total employment in the fourth quarter; the metals, transportation equipment, and machinery industries suffered the largest losses. Employment
in nondurable goods industries also
fell, cutbacks continued at construction sites, and employment in retail
trade turned down. From September
to December, nonfarm employment
fell almost 950,000.
Despite the gain in employment
during the first three quarters of 1981,
the unemployment rate receded only
slightly from its year-end 1980 level
of IVi percent. Then, with the sharp
rise in layoffs in the last four months
of the year, the jobless rate jumped
\XA percentage points to 8.8 percent.
The increase for adult men was particularly sharp because more of them
are employed in the cyclically sensitive durable goods and construction
industries; the unemployment rate for
this group rose from 5.8 percent in
July to a postwar record of 7.9 percent in December 1981.
In 1981, as in 1980, growth of the
labor force fell far below its annual
average of 2Vi percent during the
1970s. In part, the slowdown reflected a shrinking teenage population. More fundamentally, the weakness in labor demand over the past
two years apparently discouraged new

10

The Economy in 1981

job seekers. The labor force participation rate for adult women, who had
entered the work force in large numbers during the 1970s, edged up less
than 1 percentage point in 1981; the
rate for teenagers actually declined.
Because 1981 began with an economic recovery under way and ended
during a contraction, growth in productivity showed considerable cyclical
fluctuation over the year. Increases
in output per hour in the first half
were well above the trend rate of
growth in recent years. But in the
second half, productivity deteriorated
as production dropped sharply and
capacity use declined.
Wage demands were slow to respond to the erosion of employment
opportunities over the course of 1981.
Nevertheless, the trend of escalating
labor costs showed clear indications
of turning around. Wage rates for
production and nonsupervisory workers posted increases of just over 8 percent in 1981, down from 9Vi percent
in 1980. And, after moving up in the
beginning of the year, the rate of increase in white-collar earnings appeared to have leveled off by yearend. However, the moderation in
wage gains in 1981 was partially offset by a substantial increase in the
social security payroll tax, and total
hourly compensation in the nonfarm
business sector rose 9V\ percent over
the four quarters of the year, down
slightly from 10 percent in 1980.
New contracts under collective
bargaining did not contribute directly
to a slowing in wages during 1981,
but the stage was set for a moderation
in 1982 negotiations. Scheduled bargaining was light during 1981, and
gains in union wages remained large
relative to those received by nonunion workers, reflecting deferred increases and cost-of-living adjustments




negotiated previously.
However,
union contracts were reopened in
many industries during 1981. These
industries faced severe competitive
pressures from imports or from nonunion producers, and some experienced serious financial difficulties. As
a result, unions and firms in the airline, meatpacking, and rubber industries agreed to significant cost-saving
changes in negotiated contracts; by
year-end, negotiators in the trucking
and auto industries had begun to talk
about similar departures from their
traditional contracts, which are due
to be renewed in 1982.
Prices
The trend in inflation improved noticeably during 1981, and by yearend all aggregate measures of inflation were well below double-digit
rates for the first time since 1978.
Thefixed-weightprice index for gross
domestic purchases rose SVA percent
over the four quarters of 1981, much
less than in 1979 and 1980. This
slowdown in inflation was even more
pronounced in the consumer and producer price indexes, which had been
rising at a 14 to 15 percent annual
pace early in 1980: the consumer
price index rose 9Vi percent, and the
producer price index for finished
goods rose only IVA percent over the
four quarters of 1981.
Retail food prices slowed markedly,
to an increase of less than 5 percent
during 1981, the smallest advance
since 1976. Good growing weather in
1981 helped to push farm prices for
crops 15 percent below year-earlier
levels, and prices for meats and livestock also declined. Although supply
developments in agriculture were
much more favorable than in 1980, a
part of the price slowdown was also

The Economy in 1981
related to the general weakening of the
economy. Slow growth of income
restrained demand in domestic markets, while foreign customers reacted
to sharply higher U.S. prices in the
wake of a net appreciation of 16 percent in the trade-weighted exchange
value of the dollar during 1981.
Energy prices rose sharply in the
opening months of 1981 after further
price increases by the Organization of
Petroleum Exporting Countries and
the President's decontrol of prices in
domestic petroleum markets. At the
same time, the war between Iran and
Iraq curtailed supplies in the international oil market. However, by the
summer a substantial decline in demand led to price stability for petroleum products. In contrast, the
price of natural gas rose steadily
throughout 1981 for the third consecutive year, as allowed under the
decontrol schedule of the 1978 Natural Gas Policy Act.
In areas other than food and energy,
signs also accumulated during 1981
that slack demand, and in part the
rapid appreciation of the dollar, were




11

reducing the rate of price increase.
Prices for consumer commodities
other than food, energy, and houses
rose 8 percent in 1981, compared
with 9V4 percent in 1980, and prices
for capital equipment slowed markedly, from a 12 percent advance in
1980 to 9Y4 percent last year. However, price pressures persisted in consumer services, notably for medical
care.
The inflationary psychology that
had permeated many aspects of economic behavior during the previous
half decade appeared to be subsiding
in 1981. Surveys by the Survey Research Center of the University of
Michigan indicated a downturn in
expectations of inflation over the
near term. Furthermore, prices of
sensitive industrial commodities and
precious metals drifted down throughout 1981 after a decade marked by
repeated speculative bursts. Finally,
the behavior of real estate prices began to reflect the severe declines in
home sales, after several years of
rapid increases that were fueled in
part by speculative pressures.

12

Monetary Policy and Financial Markets
The principal objective of monetary
policy in 1981 was to exert continuing resistance to inflationary pressures
through measured restraint on the
expansion of money and credit, and
thereby to lay the foundation for sustained growth in real activity over the
longer term. Ranges for the monetary aggregates that the Federal Reserve believed to be consistent with
this objective implied a deceleration
in money growth in 1981 from the
preceding year. Over the year, the
actual growth of the various monetary measures exhibited divergent patterns. Growth in the narrow money
stock was unusually weak; despite a
strong pickup late in the year, Ml
ended the year below its target range.
The broader aggregates grew at a
relatively rapid rate, exceeding the
upper limits of their specified ranges.
The differences in behavior among
the aggregates last year were considerably greater than those indicated by
the historical relationships among
these measures, largely because of
rapid and fundamental changes that
were taking place infinancialmarkets.
In particular, the public displayed
more sophistication in the use of cash
management techniques, as evidenced
by the growth nationwide of negotiable order of withdrawal (NOW) accounts, the increased use of savings
instruments that pay market rates of
interest, and the explosive growth of
money market mutual funds. These
developments tended on balance to
damp growth of Ml while boosting
that of the broader measures. Such
changes in financial institutions and
cash management practices have




emerged largely in response to the
high interest rates of recent periods
and have been facilitated by regulatory changes that relaxed controls on
deposit interest rates and on the types
of instruments that may be offered by
banks and other depository institutions.
Reflecting continued strong demands for credit and concerns about
the inflation outlook, interest rates
fluctuated at generally high levels
during most of 1981, before moving
down in the fourth quarter. Shortterm interest rates began the year
close to record highs as the rebound
in the economy in late 1980 boosted
demands for money and credit above
amounts consistent with the targeted
ranges for growth in the aggregates.
After a dip early in the year, shortterm rates returned to near-record
levels in the spring. In the second
half, such rates moved down sharply,
reflecting the more accommodative
provision of reserves by the Federal
Reserve and reduced demands for
money associated with the weakening in economic activity.
Long-term interest rates fluctuated
around a distinct upward trend for
much of the year that produced new
highs by the end of the third quarter.
Given the prospect for substantial
federal budget deficits in coming
years, market participants remained
concerned about persistent pressures
on credit supplies and the implications
of deficit spending for the fight against
inflation. Such concerns continued despite widespread weakening in economic activity and indications of more
moderate rates of price increase.

Monetary Policy
Thus, although yields on long-term
securities moved down briefly during
the fourth quarter, much of that decline was reversed by early 1982.
Aggregate credit flows in 1981 reflected the changing pace of production and income growth as well as
conditions in financial markets.
Households and businesses continued
to expand their borrowing throughout
the first three quarters, but their use
of credit contracted in the final
months with the cumulative weakening in the economy. High interest
rates discouraged financing in longterm bond and mortgage markets;
consequently, credit needs in the private sector were met largely through
shorter-term borrowing. Credit demands of the federal government
reached record levels, as the deficit
was enlarged in part by the decline
in tax revenues and the rise in social
service expenditures that typically
accompany a cyclical downturn in
the economy, and by the tax cut late
in the year.
Monetary Aggregates
and Interest Rates
Money market conditions varied considerably over the course of 1981,
reflecting pressures arising as the
Federal Reserve attempted to hold
growth in the monetary aggregates
close to its targets. At the beginning
of the year, short-term interest rates
were at, or only a bit below, record
highs, after having been on an uptrend since mid-1980 as economic
activity rebounded and the System
sought to restrain monetary expansion in the face of an upsurge in the
public's demand for money. Narrow
money (Ml) contracted at the end
of 1980, and after allowance for
shifts to NOW accounts, it remained




13

weak early in 1981. With the demand
for reserves falling relative to the
provision of nonborrowed reserves
consistent with the monetary targets
of the Federal Open Market Committee (FOMC), short-term rates
eased. By the end of the first quarter, the federal funds rate was 6V2
percentage points below its January
peak, while other short-term rates
were down 2 to 3 percentage points.
At the beginning of the second
quarter, however, growth in money
accelerated sharply, renewing pressures in the reserves market. These
pressures led to a rise in short-term
market interest rates. In early May,
the Federal Reserve increased both
the basic discount rate and the surcharge rate by 1 percentage point.
Although the narrow money stock
contracted in May and June, the
federal funds rate hovered near previous peaks in the summer months.
However, other short-term rates began to ease somewhat in midsummer.
By late summer, the cumulative
weakness in growth of Ml led to
efforts by the Federal Reserve to
increase supplies of nonborrowed reserves. As a consequence, the federal
funds rate declined through the fourth
quarter, and other short-term interest
rates also fell. In late September and
again in mid-October, the surcharge
was reduced 1 percentage point, and
in November it was eliminated. In
addition, the discount rate was reduced from 14 percent to 13 percent
in early November and to 12 percent
one month later.
Long-term rates moved quite differently. Bond rates, like many shortterm rates, began the year only a bit
below the record highs that had been
established in December. However, in
contrast to the declines in yields on
short-term instruments, long-term

14

Monetary Policy

rates generally rose over the first
quarter. Many participants in financial markets apparently were concerned about the prospects for continuing large federal budget deficits
and the growing backlog of potential
long-term financing by corporations, in
the face of efforts to control inflation
with monetary restraint. These concerns remained a prominent feature
of market sentiment during the second and third quarters, and long-term

rates moved well above their previous
highs even as some short-term rates
retraced part of their earlier declines.
The decline in bond rates in the
fourth quarter, more moderate than
the drop in short-term interest rates,
seemed to reflect the widespread deterioration of economic activity and
some renewed optimism about the
prospects for reduced
inflation
spurred by encouraging price data.
At year-end, however, these declines

Interest Rates
Percent per annum

Short-term

Long-term

Aaa

U.S. government bonds

1975
1977
Monthly averages except for Federal Reserve discount rate and conventional mortgages
(based on quotations for one day each month).
Yields: U.S. Treasury bills, market rate on
three-month issues, discount basis; 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



State and local government bonds

1979
1981
utility bonds, weighted averages of new publicly offered bonds rated Aaa, Aa, and A by
Moody's Investors Service and adjusted to
Aaa utility basis by Federal Reserve staff; 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.

Monetary Policy

15

Reserves and Monetary Aggregates
Based on seasonally adjusted data unless otherwise noted; in percent except memo items
in billions of dollars x
1980
Item

1979

1980

1981

Member bank reserves
Total
Nonborrowed
Required
Monetary base3

2.5
.1
2.3
7.6

7.1
7.8
6.8
8.8

Concepts of money4
Ml
Ml-B shift adjusted
M2
M3

7.4
7.4
8.4
9.8

7.3
7.3
9.2
10.0

1981

Q4

Ql

Q2

Q3

Q4

4.3
6.8
4.6
4.9

14.3
4.7
13.0
10.6

5.5
10.7
6.4
5.2

4.2
-2.4
5.0
5.8

4.0
7.9
3.1
4.3

3.2
10.5
3.5
3.9

5.0
2.3
9.5
11.4

11.1
11.1
8.8
10.7

4.6
-.9
7.5
11.1

9.2
5.7
12.0
12.2

.3
-.4
8.3
11.2

5.7
4.7
8.8
9.2

12.9
11.0
10.2
16.7
- 7 . 9 -22.8

9.9
12.4
-11.8

2

Nontransaction components of M2
Total (M2 minus M l )
Small time deposits
Savings deposits
Money market mutual fund
component (n.s.a.)
Overnight RPs and overnight
Eurodollar deposits
(n.s.a.)
MEMO (change in billions of
dollars)
Managed liabilities at commercial
banks5
Large time deposits, gross
Nondeposit funds
Net due to foreign-related
institutions
Other6
U.S. government deposits at
commercial banks

8.8
22.7
-11.8

8.5
8.0
12.3
21.1
.2 -26.8

386.2

96.2

132.6

5.2

86.5

125.7

20.1

25.8

7.2

22.0

13.9

49.2

14.9 -44.1

57.1
20.7
37.4

22.9
28.5
-5.6

64.7
66.7
-2.0

23.6
16.4
7.2

25.4
22.1
3.3

9.8
13.9
-4.1

29.2
26.4
2.8

-4.0

25.1 -22.9
12.3
17.3

-6.2
4.2

-.5
7.7

-2.8
6.1

-1.8
-2.3

3.5
-.7

-5.1
1.1

2.4

-.9

.1

2.5

-2.5

2.2

.2

1. Changes are calculated from the average
amounts outstanding in each quarter.
2. Annual rates of change in reserve measures have been adjusted for regulatory changes
in reserve requirements.
3. Consists of total reserves (reserve balances of depository institutions in the current
week plus vault cash held two weeks earlier),
currency in circulation (currency outside the
U.S. Treasury, Federal Reserve Banks, and the
vaults of depository institutions), and surplus
vault cash at depository institutions.
4. Ml consists of currency in circulation,
traveler's checks of nonbank issuers, demand
deposits at all commercial banks other than
those due to domestic banks, the U.S. government, and foreign banks and official institutions less cash items in the process of collection
and Federal Reserve float, and other checkable
deposits (OCD). OCD consists of negotiable
order of withdrawal and automatic transfer
service accounts at depository institutions,
credit union share draft accounts, and de-




9.8
11.0
14.5
15.9
-4.6 -16.3

.4

91.2

74.0

.3
4.3

mand deposits at mutual savings banks. M2
is Ml plus overnight repurchase agreements
(RPs) issued by commercial banks, overnight
Eurodollar deposits held by U.S. nonbank
residents at Caribbean branches of U.S. banks,
money market mutual fund shares other than
institution-only fund shares, and savings and
small time deposits (including retail RPs) at
all depository institutions. M3 is M2 plus large
time deposits at all depository institutions and
large term RPs issued by commercial banks
and thrift institutions and institution-only
money market mutual funds.
5. Managed liabilities have been adjusted
to include liabilities shifted to international
banking facilities in December 1981.
6. Consists of borrowings from other than
commercial banks through federal funds repurchased and securities sold under repurchase
agreements plus loans sold to affiliates, loans
sold under repurchase agreements, and other
borrowings.
n.s.a. Not seasonally adjusted.

16

Monetary Policy

were in large part reversed as concerns again mounted about federal
borrowing requirements over the
next few years.
Continued high interest rates in
1981 evidently stimulated more intensive use of cash-economizing techniques by businesses and households,
leading to an extraordinarily weak
demand for narrow money, given income and interest rates, during most
of the year. The introduction at the
end of 1980 of NOW accounts nationwide may have stimulated a general reconsideration by households
of alternative deposit and nondeposit
instruments and thereby reinforced
the response to continued high interest rates. Increasing familiarity with
money market mutual funds may also
have been a factor in the slow growth
of Ml.
As expected, NOW accounts attracted a sizable volume of funds in
1981, amounting to roughly $51 billion, more than 80 percent of which
was at commercial banks. The flows
into NOW accounts were strong in
the first four months of the year
and then slowed substantially. Funds
were shifted into NOW accounts from
demand deposits and from interestearning assets included in M2, such
as savings accounts. Because shifts
from savings accounts and other nondemand-deposit sources distort the
growth of Ml-B, the Federal Reserve
established its growth range for this
aggregate on a basis that abstracted
from such shifts, facilitating comparisons with earlier years. Adjustments
were estimated on the basis of various
surveys of depository institutions and
individuals, as well as by statistical
techniques. After account is taken of
these adjustments, Ml-B expanded in
1981 at a rate of only IVk percent,
the FRASER growth for any year since
slowest
Digitized for


the early 1960s and below the range
of 3Vi to 6 percent adopted for this
aggregate by the FOMC.
While the narrow money stock was
unusually weak in 1981, the broader
monetary aggregates were above the
upper limits of their specified target
ranges. In past periods of rising interest rates, the velocity of M2—defined as the ratio of GNP to M2—has
risen because funds were diverted
from fixed-rate accounts at depository
institutions to higher-yielding market
instruments. But the composition of
M2 has changed markedly since
1978: its nontransaction component
now contains a variety of attractive
assets bearing market-related yields.
The volume of such instruments continued to expand rapidly in 1981,
insulating M2 from the damping effects of rising interest rates by encouraging investors to keep their
funds in financial intermediaries. The
growth of the money market mutual
fund component of M2—which was
revised in February 1982 to exclude
funds confined to institutional investors—was particularly strong, accounting for almost 60 percent of the
increase in the nontransaction component of M2 in 1981.
Inflows of savings and small-denomination time deposits accounted
for a much smaller proportion of the
increase in the nontransaction component of M2 in 1981 than in other
recent years. Outflows from savings
accounts were much greater in 1981
than in the preceding year, even after
adjusting for shifts into NOW accounts, although late in the year runoffs of savings deposits were reversed
as heightened uncertainty about the
economy apparently contributed to
greater liquidity preference. Net issuance of six-month money market
certificates was only about a third of

Monetary Policy

17

Monetary, Bank Credit, and Reserve Aggregates
Billions of dollars

Billions of dollars
Targeted and actual Ml-B

Targeted and actual Ml-B shift adjusted

8'•':%

440

440

420

420

Targeted and actual M3

Targeted and actual M2

'w

180

°

2200

2100
1700
2000

Reserve aggregates

Targeted and actual bank credit

40
1300

Total reserves

38
1200

'80

1981

Ml-B shift adjusted is adjusted for the impact of nationwide NOW accounts.
Targets are ranges adopted by the FOMC
for 1980 Q4 to 1981 Q4.
Data for bank credit before February are
adjusted for a discontinuity in the series. The
December figure is adjusted for shifts of assets



Nonborrowed reserves

'80

1981

into international banking facilities.
The reserve aggregate series have been adjusted to remove discontinuities associated
with changes in reserve requirement ratios and
the distorting effects of weekend reserve avoidance activities in 1980. Nonborrowed reserves
include extended credit.

18

Monetary Policy

that in 1980 as rates paid on these
certificates exceeded those available
on money market funds for only two
or three months in 1981. In addition,
flows into 21/i-year small savers certificates were quite weak until August,
when the cap on the ceiling rate
imposed in late 1980 was removed.
In October, tax-exempt all savers
certificates were introduced, attracting
$43 billion in the fourth quarter of
1981. Savings and loan associations
accounted for almost half of this flow,
while commercial banks and mutual
savings banks garnered 40 and 10
percent respectively. The all savers
certificates apparently augmented
overall deposit flows only moderately,
however; most of the funds are
thought to have come from savings
and other time deposits already included in M2.
Finally, retail repurchase agreements, which were included in M2
with the February 1982 revision,
edged up over the first few months
of 1981 and then advanced sharply
in the summer. (Retail repurchase
agreements are in denominations of
less than $100,000, mature in less
than 90 days, and are not subject to
interest rate limitations.) During the
third quarter of 1981, many depository institutions actively promoted
this instrument, both to retain funds
they already held and to attract funds
that might later be rolled over into all
savers certificates.
M3 grew HVi percent in 1981,
Wi percentage points faster than in
1980 and 2 percentage points more
than M2. Large-denomination time
deposits, which account for the bulk
of the difference between M3 and
M2, increased rapidly in 1981 as depository institutions expanded their
managed liabilities offered domestically to offset the weakness in core




deposits and a reduction in borrowings from abroad. Commercial banks
in particular financed most of the
excess of strong credit expansion over
core deposit growth by issuing largedenomination certificates of deposit.
The rapid growth of money market
mutual funds catering only to institutional investors also accounted for a
sizable portion of the difference between M2 and M3.
Commercial bank credit, inclusive
of assets shifted from domestic banking offices to international banking
facilities (IBFs) in December, grew
8% percent in 1981, somewhat faster
than in 1980; exclusive of assets
shifted to IBFs, bank credit grew
SV4 percent, still a bit faster than in
the previous year. (IBFs are limitedpurpose facilities that were authorized
in early December to accept deposits
from and to extend credit to foreign
entities; the foreign deposit liabilities
of IBFs are not subject to reserve
requirements or to interest rate ceilings, and in a number of states earnings of IBFs have been granted favorable tax treatment.) The pickup in
expansion of bank credit in 1981 reflected stronger total loan growth,
including that at IBFs. Business lending of U.S. offices of commercial
banks accelerated as conditions in
bond and equity markets were unfavorable for most of the year. In
addition, commercial and industrial
loans to U.S. residents booked at
foreign branches of U.S. banks, which
are not included in the standard measure of bank credit, increased substantially more in 1981 than in 1980 as
the spread of the prime rate over
the London interbank offer rate
(LIBOR) remained large by historical standards during much of the year.
Many large banks include a LIBORbased rate as a pricing option in loan

Monetary Policy

19

agreements with large corporate customers, and some report that they
often book or rebook loans at their
foreign branches when customers
elect the LIBOR option. The pickup
in total loan growth at commercial
banks in 1981 also reflected a small
increase in lending to consumers and
nonbank financial institutions as well
as a stronger pace of security lending.
Faced with large loan demands, banks
markedly slowed their security acquisitions in 1981; U.S. government obligations accounted for the bulk of the
slowdown.

Funds Raised by
Domestic Nonfinancial Sectors
Billions of dollars

Aggregate Credit Flows

1977
1979
1981
Excludes equities. Data are semiannual
totals at seasonally adjusted annual rates.

After a rapid rebound in the second
half of 1980, net credit flows to nonfinancial sectors of the U.S. economy
continued strong in the first half of
1981, then fell sharply in the final
months of the year in response to the
weakening in economic activity. For
the year as a whole, net credit flows
to domestic nonfinancial sectors
totaled approximately $369 billion,
an increase of 12 percent from 1980,
but somewhat below the totals for
1978 and 1979.
Borrowing by households and
businesses rose only moderately in
1981 with virtually all of the increase
in the form of short- and intermediate-term credit obligations, including bank loans, commercial paper
issues, and consumer installment
credit. The volume of corporate
bond financing, in contrast, remained
below the record levels of 1980 as
long-term interest rates generally
trended up through much of the year,
and activity in the already sluggish
mortgage markets weakened steadily
as the year progressed. In the public
sector, net borrowing by the U.S.
Treasury reached a new high as the



Total

Private sectors
200

Federal government
State and local

government financed a $93 billion
combined deficit of the federal government and off-budget agencies. Net
issuance of state and local government debt remained sizable during the
year despite sharply rising yields on
tax-exempt securities.
The U.S. Treasury raised approximately $87 billion in U.S. credit markets in 1981 and financed the remainder of the combined federal
deficit by drawing down its cash balance and through nonmarket sources
of finance. The borrowing by the
Treasury was concentrated in marketable debt issuance that more than
offset redemptions of savings bonds
and nonmarketable debt in an amount
close to $10 billion. Net sales of
Treasury bills accounted for roughly
one-fourth of the funds raised in markets, and coupon issues accounted for
the remainder. Money market mutual
funds absorbed a substantial portion
of the net increase in short-term
Treasury debt; households, which
typically are attracted to open market instruments in periods of high

20

Monetary Policy

interest rates, also were major direct
purchasers of government securities
in 1981. On the other hand, commercial banks greatly curtailed their
acquisitions of Treasury securities in
an environment of strong demand for
bank loans.
State and local governments experienced increased financial pressures in
1981, resulting in part from cuts in
federal grants coupled with sluggish
growth in tax revenues. Although
many governmental units reduced
their activities in this environment,

capital requirements generally continued to rise, and demands for funds
in municipal markets remained sizable. Such demands were enlarged
further by increased use of tax-exempt
industrial revenue bonds to finance
private corporate needs.
On the supply-of-funds side, however, the market for tax-exempt securities weakened perceptibly in 1981
as the primary institutional investors,
property and casualty insurance companies and commercial banks, greatly
curtailed their acquisitions. Indeed,

Net Funds Raised and Supplied in Credit Markets
Billions of dollars
1981 1

Sector
Ql

Q2

Q3

Q4'

Net funds raised
Total, all sectors

476

418

478

468

537

510

397

37
18
20

79
25
27

87
22
31

128
30
33

43
22
38

58
12
16

120
26
37

Private domestic nonfinancial
Business
Household

318
147
171

226
124
102

259
153
107

233
113
120

317
190
127

284
168
117

203
140
63

Domestic financial
Private intermediaries —
Sponsored credit agencies
Mortgage pool securities .

82
34
24
24

61
18
24
19

78
35
30
13

44
18
9
17

117
65
40
12

139
63
65
11

12
-7
5
14

U.S. government
State and local government
Foreign

Net funds supplied
Total, all sectors

476

418

478

468

537

510

397

U.S. Government
State and local government
Foreign

19
17
-6

24
24
20

25
21
12

31
34
50

29
12
26

20
14
-25

19
23
-5

93
8
85

32
4
28

60
12
48

11
-5
16

103
25
78

86
16
70

38
12
26

354
292
121
56
66
49

319
270
100
58
80
32

361
308
103
26
84
95

341
321
70
42
69
140

367
134
42
90
56

414
321
112
8
84
117

322
267
98
12
92
65

29
24
8

25
19
5

31
13
9

10
17
-7

42
12
-8

66
11
16

6
14
34

Private domestic nonfinancial
Business
Household
Domestic financial
Private intermediaries
Commercial banks
Thrift institutions
Insurance and pension funds
Other 2
Sponsored credit agencies
Mortgage pool securities .
Federal Reserve System ..

1. Seasonally adjusted at annual rates.
2. Includes finance companies, money market funds, real estate investment trusts, open


321

end investment companies, and security brokers and dealers,
p Preliminary.

Monetary Policy
such investors provided only about
30 percent of net funds raised in municipal markets in 1981 compared
with 85 percent in 1979 and 1980.
A lessening of the need for taxexempt income, because of reduced
earnings in the case of the insurance
companies and the availability of
other methods for sheltering income
from taxes in the case of banks, apparently reduced the attractiveness of
municipal securities to these two
types of institutions and left individuals as the primary purchasers of taxexempt securities in 1981. For their
part, individuals may have required
higher yields on such securities—
especially in the latter part of the
year—in light of forthcoming reductions in marginal income tax rates,
the introduction of the tax-exempt
all savers certificate, and the broadened eligibility for individual retirement accounts and the enlargement
of maximum contributions to Keogh
plans in 1982.
Reflecting all these factors, yields
on municipal securities rose considerably more last year than did rates
on taxable debt issues. At year-end,
the ratio of tax-exempt to taxable
yields exceeded by 5 percentage
points its average level of the last 10
years. Even though yields on municipal bonds rose to record levels, the
net volume of tax-exempt financing
remained substantial, buoyed in part
by a rebound in offerings of mortgage
revenue bonds in the final quarter.
For the year 1981, net funds raised
by state and local governments totaled
an estimated $22 billion, compared
with $25 billion in the previous year.
Net credit flows in the nonfinancial
business sector followed an uneven
pattern during 1981. At the beginning of the year, strong growth in
corporate internal funds accompanied




21

the acceleration in real GNP growth
and greatly reduced corporate needs
for external financing. But as the
economy slowed, corporate profits
turned sluggish, while sizable unintended inventory
accumulation
boosted requirements for financing.
Consequently, businesses undertook
an exceptionally large volume of
financing in the second and third
quarters, most of which was concentrated in short-term markets, especially at commercial banks and in the
commercial paper markets. The pace
of borrowing diminished considerably
in the final months of the year in
association with the contraction in
production and lower capital requirements, but on balance corporate
credit demands were about 20 percent higher for the year than in 1980.
Although corporations issued a record volume of new stock, net financing in equity markets was negative
in 1981 as retirements and cash purchases of stock in connection with
merger activities exceeded the volume
of new issues.
The focus of business demands on
short-term sources of funds reflected
in large part the high cost of issuing
long-term debt in 1981. Yields on
corporate bonds trended up during
most of the year, with rates on highest-grade issues reaching record levels
above 17 percent in the fall. Although
the brief decline in long-term interest
rates in November produced a surge
in new bond issues, for the year as a
whole long-term debt issuance by
corporations was substantially below
the record volume of 1980. Thus corporations made virtually no progress
in funding short-term liabilities in
1981, and the ratio of short-term to
total debt of the nonfinancial corporate sector rose to an unprecedented
level. Reflecting this development

22

Monetary Policy

and the general deterioration in other sharply in 1981, in consequence of
financial measures and profitability, rising interest rates and tightening
downgradings of corporate debt is- supplies of mortgage credit. Weak
suers accelerated in 1981, while the deposit flows and continued erosion
number of bankruptcies and failures of earnings constrained the supply of
rose sharply.
mortgage funds at thrift institutions,
The household sector increased its and rates on new commitments for
borrowing slightly in 1981 from the conventional home mortgages at savlow 1980 levels. All of the increase ings and loan associations rose perreflected growth in consumer install- sistently during much of the year to
ment credit, which had been severely reach record levels above 18Vi perdepressed during and immediately cent in October. Direct credit flows
after the credit restraint program of from insurance companies and fed1980. Increases in automobile loans erally sponsored agencies remained
bolstered growth in installment credit near 1980 levels, providing no offset
in the first and third quarters of 1981, to the reduction in mortgage lending
when manufacturers sought to stimu- from depository institutions. In adlate car sales through rebates or other dition, the flow of funds through
incentive programs; financing of con- municipal units slowed because of
sumer durable goods and other restrictions on the issuance of mortnonauto goods also strengthened dur- gage revenue bonds.
ing the spring and early summer.
The taut mortgage credit condiEven with the pickup, consumer tions encouraged use of so-called
installment debt expanded much "creative financing" techniques, inmore slowly in 1981 than in 1978 cluding wraparound loans, builder
and 1979. Partly as a result, the buydown arrangements, and the asfinancial position of the household sumption of low-rate first trusts when
sector appeared to have improved in house sellers were willing to take back
some respects since the beginning of a second mortgage. Adjustable-rate
1980. By late 1981 delinquency rates instruments became a more common
on installment loans had fallen con- feature of mortgage lending, facilisiderably from 1980 peaks, and auto tated by changes in federal regulations
finance companies were reporting and the evolution of secondary martheir lowest delinquency rates in al- kets for such instruments. By yearmost a decade. At the same time, end, almost 40 percent of convenhowever, delinquency rates on mort- tional first mortgage home loans being
gages moved up.
made carried some adjustable-rate
Flows of home mortgage funds, feature that spread the risks of future
which form the major share of fluctuations in interest rates between
household net borrowing, contracted borrower and lender.




23

International Developments
Economic activity in foreign industrial countries, on average, recovered
only weakly in 1981 from the slowdown experienced in 1980. Industrial production in those countries at
the end of the year was generally
close to, or below, the level reached
at the end of 1978. The exception
was Japan, where activity moved
ahead as strong exports offset slack
domestic demand. With production
faltering in industrial countries, unemployment rates reached the highest
levels in the postwar period. This
general economic slowdown largely
reflected efforts by authorities to
achieve a significant reduction in inflation. Such efforts, involving mainly
restrictive monetary and fiscal policies, were aided by a reduction in
oil prices from their peak in the
spring, but were impeded in some
cases by the depreciation of currencies against the dollar. Several countries were able to scale down their
Gross National Product
1970=100

United States

1977
1979
1981
Foreign is multilaterally weighted average of
the Group of Ten (G-10) countries plus
Switzerland, using 1972-76 total trade weights.
Data for the United States are from the
U.S. Department of Commerce.



inflation rates during the year, but
for most, progress was slow and difficult.
Most countries had planned to reduce their budget deficits in 1981,
but the severity of the decline in activity curtailed expected receipts while
raising unemployment-related outlays. Though fiscal policy remained
restrictive, the main thrust of the
anti-inflation effort was exerted by
monetary policy, which generally was
geared to restraining the growth of
the money stock. U.S. short-term
interest rates were above foreign rates
except for an interval late in the
year, but they tended to decline relative to foreign rates over the course
of the year.
Through the first eight months of
1981, the weighted-average exchange
value of the dollar increased spectacularly, scoring a rise of 27 percent.
After the August peak, the dollar's
average value declined 9 percent to
year-end. Several factors may have
supported the dollar in the early part
of the year. There was no further rise
in U.S. short-term interest rates relative to foreign rates, but U.S. rates
stayed at a high level, and the passage
of the fiscal program of the new administration through the Congress favorably impressed the market. Moreover, the U.S. international balance
on current account (trade, services,
and transfers) remained positive,
while the current account of Germany remained in deficit and Japan
was just beginning to shift from
deficit to surplus. After midyear
these conditions began to change:
U.S. interest rates dipped relative to

24

International Developments

those in other major countries; the
likelihood that U.S. budget deficits
would be much larger than projected
stirred market concern about the outlook for inflation; and given the sharp
runup in the dollar's exchange value,
a shift to deficit in the U.S. current
account seemed likely, in contrast to
stronger current account positions for
Germany and especially for Japan.

U.S. Balances on Trade and
Current Account
Billions of dollars

Current Account Transactions
Major influences on the U.S. current
account in 1981 were the continued
Merchandise trade
weakness in world economic activity,
1977
1979
1981
changes in the exchange value of the
Data are from the U.S. Department of
dollar, the rise in interest rates on Commerce and are seasonally adjusted at
dollar-denominated assets, and the annual rates.
reduction in U.S. demand for imported petroleum. Demand for U.S. in the trade deficit was matched by
exports was weak, and the volume of gains in net service receipts, so that
shipments fell somewhat, though the the overall current account registered
value of exports was higher as export close to the same small surplus as in
prices continued to rise. The volume 1980.
of U.S. merchandise imports rose Capital Transactions
moderately during the year as a considerable decline in the volume of oil Net outflows of private capital, as reimports was offset by a higher volume corded in the international accounts,
of other imports. Import prices de- were considerably reduced in 1981
clined somewhat with the appreciation from the exceptionally high amount
of the dollar and falling commodity reported in 1980. Net outflows
prices. For the year as a whole the through banking channels appear to
trade deficit was somewhat higher have increased somewhat, but outthan in 1980, and it was tending to flows associated with U.S. direct forrise in the later months.
eign investments (including earnings
In the earlier part of the year the retained abroad) were much lower
U.S. trade balance was still under the than in other recent years. The reducinfluence of the depreciation of the tion in the flow of financing from U.S.
dollar in 1977 and 1978. However, firms to their foreign affiliates probthe subsequent rise in the dollar was ably reflected high U.S. interest rates,
increasing the trade deficit by the but another important element was a
fourth quarter of 1981. Meanwhile, drop in foreign earnings associated
larger net interest returns on interna- with low demand abroad and prestional portfolio investments were sures on oil prices in the course of the
more than offsetting a decline in net year.
earnings on direct investments. For
Banking data indicate that U.S.
the year as a whole, the small increase nonbanks made increasing use of in


International Developments
ternational banking channels in 1981.
U.S. investors, including money market mutual funds, placed large
amounts in dollar deposits at the
foreign offices of U.S. and foreign
banks. Yields on such assets tend to
be higher than those on comparable
U.S. assets because they are not subject to the costs of reserve requirements. At the same time, U.S. cor-

25

porations appear to have borrowed
considerable amounts from offshore
banking offices. The continuation of
a large positive residual in the international accounts suggests that a significant net inflow was not captured
in the reporting system for those
accounts.
Foreign official reserve assets in
the United States rose only slightly

U.S. International Transactions1
Billions of dollars
Quarter

Year

Transactions

1980

1981
Q4 2

1980

1981

Q4

Ql

Q2

Q3

Current account 3
Merchandise trade balance
Exports
Imports
Investment income (net) 4 ..
Other services
Unilateral transfers, private
and government

3.7
-25.3
224.0
249.3
32.8
3.3

5.5
-27.8
236.1
264.0
36.5
3.9

1.4
-5.6
57.1
62.7
8.2
1.1

33
-4.7
61.0
65.7
9.0
.5

1.1
-6.9
60.4
67.3
8.7

2.1
-7.0
57.9
65.0
9.5
1.5

-7.1

-7.0

-2.3

-1.5

-1.5

-1.9

-2.1

Private capital flows, net
Bank-reported capital, net
(outflows, —)
U.S. net purchase (—) of foreign
securities
Foreign net purchase ( 4-) of
U.S. Treasury securities
Foreign net purchase of other
U.S. securities
U.S. direct investment abroad 4 ..
Foreign direct investment in
United States 4
Other corporate capital flows, net

-36.7

-29.4

-6.4

- 14.9

-3.9

6.1

-16.7

-36.1

-38.4

-5.4

15.1

-7.7

1.9

-17.5

-3.3

-5.4

-.4

-.5

-1.5

-.5

-2.9

Foreign official assets in
United States (increase, + ) ..
U.S. government foreign assets,
net (increase, —)
Reserve position in IMF
Convertible currencies and other
reserve assets
U.S. government foreign credits
and other claims, net
Allocation of special drawing
rights
Seasonal adjustment discrepancy
Statistical discrepancy

-9.3
56.8
66.1
9.3
1.1

2.7

1.3

1.0

1.4

.7

-.5

-.3

5.4
-18.5

7.3
-9.9

2.2
-7.1

2.5
-1.6

3.5
-4.9

.8
-1.4

.5
-2.0

10.9
2.5

13.7

2.2

2.1
1.2

2.5
-4.0

3.8
2.2

3.9
2.0

3.5
2.0

15.5

4.9

7.7

5.5

-2.8

-5.8

8.0

-13.4

-11.4

-5.4

-5.9

-2.4

-1.2

-1.7

-2.5

-1.2

-.7

-.8

-.6

-1.9
-.4

-6.5

-1.6

-4.3

-2.4

-.1

.9

-5.2

-7.3

.1

-2.8

-1.5

-1.5

1.2

1.1

29^6

293

1.2
6.7

-2.6
1.4

1. Details may not add to totals because of
rounding.
2. Data are partial and preliminary, and
include Federal Reserve staff estimates.



-1.0

2.1
.6

1.1
-.3
11.2

-1.5

1.7
9.9

3. Current account seasonally adjusted;
other accounts not seasonally adjusted.
4. Includes reinvested earnings.
SOURCE. U.S. Department of Commerce,
Bureau of Economic Analysis.

26

International Developments

Weighted-Average Exchange Value and
Interest Rate Differential
Percent per annum

March 1973=100

Weighted-average
exchange value
98

86

1980
1981
Exchange value of U.S. dollar is the index
of weighted-average exchange value of the
U.S. dollar against currencies of the other
G-10 countries plus Switzerland, using 1972-76
total trade weights.
Interest rate differential is the interest rate
on three-month U.S. CDs minus the weightedaverage foreign three-month interest rate for
other G-10 countries plus Switzerland using
1972-76 total trade weights.

U.S. authorities did not intervene in
the market after late March, they
were prepared to intervene on several
occasions.
The dollar began to rise strongly in
late January as the new administration took office with an established
agenda to reduce government expenditures and to support a tight
monetary policy with the aims of
reducing inflation and revitalizing the
U.S. economy. In January and February the Federal Reserve and the
Treasury continued to purchase foreign currency to add to balances and
to provide cover for the Treasury's
note liabilities ("Carter notes") denominated in foreign currency. In
those two months the Federal Reserve made net purchases of $1,048
million equivalent of marks and $10
million equivalent of Swiss francs, but
sold $50 million equivalent of Japanese yen, while the Treasury purchased like amounts of marks and
Swiss francs.
The dollar weakened from late

in 1981, after a sizable buildup in
1980. The change reflected mainly
the strengthening of the dollar, with
several countries that had accumulated reserves in 1980 selling dollars, Selected Exchange Rate Indexes
on balance, in support of their curDecember 1979=100
rencies in exchange markets in 1981.
Reserves held in the United States by
the oil-producing countries (OPEC)
rose substantially in 1981, about as
much as in 1980, though the OPEC
surplus declined sharply between the
two years.
Operations in Foreign Currencies
The exchange value of the dollar
appreciated sharply in 1981, as noted
above, and U.S. authorities purchased, net, $2 billion equivalent of
foreign currencies in the early months
of the year. After a reassessment of
intervention policy a minimal intervention policy was adopted. Although




100

U.K. pound
1980
1981
Weighted-average dollar is the index of
weighted-average exchange value of the U.S.
dollar against the currencies of other G-10
countries plus Switzerland, using 1972-76 total
trade weights. Other currencies are bilateral
rates against the U.S. dollar.

International Developments

27

U.S. Government Purchases and Sales (—) of Foreign Currencies, 1981 1
Millions of dollars equivalent
Agency

German marks

Swiss francs

Japanese yen

Total

Federal Reserve

f
i

1,151
-129

10
0

0
-50

1,151
-179

Treasury

f
(

1,137
-113

10
0

0
0

1,137
-113

1. Data refer to transactions during the first quarter of 1981; there were no U.S. government
transactions after March.

February through late March as monetary conditions tightened abruptly in
Germany and several other foreign
countries while U.S. interest rates
declined. The United States intervened on only two days in March,
purchasing marks on one day, then
selling marks to support the dollar
as the market faltered after the
news of the assassination attempt on
President Reagan. For the month the
Federal Reserve and the Treasury
each sold, net, $25 million equivalent
of marks.
From late March through early
August the dollar soared, reaching
a peak, on a weighted-average basis,
some 27 percent higher than at yearend 1980. From early August through
the end of November the dollar declined, first because of the market's
concern over the inflationary implications of the prospective budget
deficits, then because of a weakening
in U.S. interest rates and economic




activity. By year-end, however, the
dollar had firmed somewhat with the
renewed rise of U.S. interest rates.
It ended the year showing a net advance from year-end 1980 of 16 percent on a weighted-average basis,
including gains of 25 percent against
sterling, 13 percent against the mark,
and 8 percent against the yen.
The Federal Reserve's foreign currency assets at year-end were valued
at $3,247 million, mostly in marks.
No drawings on the Federal Reserve
swap network were outstanding. In
addition, the Federal Reserve held,
under warehousing agreement, some
$1,932 million equivalent of foreign
currencies for the Treasury. The Federal Reserve realized profits of $4.9
million on foreign currency purchases
and sales in 1981, but incurred translation losses of $310.8 million on its
foreign exchange position at year-end,
reflecting the dollar's sharp appreciation during the year.

28

Monetary Policy Reports

Monetary Policy Reports to Congress
Given below are reports submitted to
the Congress by the Federal Reserve
on February 25,1981, and on July 20,
1981, pursuant to the Full Employment and Balanced Growth Act of
1978.
Report on February 25,1981
A Review of Developments in 1980
Monetary Policy and the Performance
of the Economy in 1980
The past year was marked by considerable turbulence in the nation's
economy and credit markets. Output
and employment experienced extraordinarily sharp swings—generally confounding forecasters inside and outside government—and so, too, did
interest rates and financial flows. On
balance, the level of the aggregate
output of goods and services at the
end of 1980 was little changed from
that at the beginning of the year, and
with a growing labor force, unemployment was appreciably higher. At
the same time, inflation continued at
about the same unacceptably high rate
as in 1979.
Many factors—some of them beyond the realm of the purely economic—combined to produce this distressing performance. At bottom,
however, the behavior of the economy
demonstrated rather vividly the difficulties of overcoming a deeply entrenched inflation and, particularly,
the stresses that arise when necessary
monetary restraint is not adequately
supported by other instruments of
public policy.
As 1980 began, the underlying
trend of price increase was approach-




ing a double-digit pace, and a recent
further jump in international oil prices
has threatened to worsen that trend.
There was broad consensus that fighting inflation must be the top priority
for national economic policy. The
Federal Reserve shaped its policy for
1980 with the objective of reining in
inflationary forces in the economy
and establishing a framework within
which decisionmakers in both the public and the private sectors could look
forward over the longer run to a restoration of reasonable stability in the
general price level.
The basic premise of the System's
policy is the broadly accepted notion
that inflation can persist over appreciable spans of time only if it is accommodated by monetary expansion.
The strategy to which the System has
committed itself is to hold monetary
growth to rates that fall short of such
accommodation and thus encourage
adjustments consistent with a return
to price stability over time. To be
sure, the relationships between the
growth of money and the behavior of
the economic variables of ultimate
concern—such as production, employment, and inflation—are not in practice absolutely stable or predictable,
especially in the short run. But the
crucial fact is that rates of monetary
expansion in the vicinity of those
specified by the Federal Open Market
Committee (FOMC) last February
implied a substantial degree of restraint on the growth of nominal gross
national product—that is, the combined result of inflation and real
growth. Put differently, the FOMC's
ranges for monetary growth implied

Monetary Policy Reports
that, if inflation did not abate, there
would in all likelihood be strong financial restraint on economic activity reflected in an easing of pressures on
markets for goods and services and
thence on productive capacity, factors
that in turn would help to contain
the momentum of inflation. This stabilizing influence was especially critical in a circumstance in which the
impulse of a price hike by the Organization of Petroleum Exporting Countries could easily have led to a
ratcheting upward of the trend rate
of inflation.
In any event, inflation did not abate
in 1980. But neither did it gain new
momentum as many feared it might.
Rather, the increases in most aggregate price indexes were about the
same as were recorded in 1979. The
fixed-weight price index for GNP rose
9Vi percent last year, a little more
than in 1979, while the consumer
price index rose 1 2 ^ percent, somewhat less than in 1979. Such rates of
inflation themselves result in a substantial increase in the amount of
money needed to finance transactions.
Thus, even though the monetary aggregates generally expanded at rates
near or a bit above the upper ends of
the FOMC's announced ranges, the
steep rise in prices resulted in marked
pressures in the credit markets that
exerted restraint on economic activity
and kept inflationary pressures from
worsening.
These developments did not occur
evenly throughout the year. During
the opening months, the late-1979
boost in imported oil prices combined
with other factors—including strife in
Afghanistan, unsettlement in the Middle East generally, and attendant fears
that an escalation of defense spending might greatly enlarge already
sizable federal deficits—to aggravate




29

inflationary expectations. These expectations contributed importantly to
the upward pressures on interest rates
that were associated with the Federal
Reserve's efforts to contain growth in
the monetary and credit aggregates.
Then, in March, President Carter announced an anti-inflation program
that included the application by the
Federal Reserve of special restraints
on credit growth by utilizing the
powers of the Credit Control Act of
1969.
The tightening of credit markets
and the psychological impact of the
credit restraint program on consumers
contributed to the sharpness of the
economic decline that occurred in the
first half of the year, although a decline at some point had long been
anticipated in the light of strong pressures on financial positions and other
factors. The drop in real GNP during
the second quarter far exceeded the
expectations of forecasters; in fact, it
was the sharpest of the postwar period. However, with the slump in activity came a pronounced weakening
of demands for money and credit and
a steep decline in interest rates. The
lowering of credit costs, coupled with
removal of the special credit restraints, in turn was instrumental in
bringing about a rebound in economic activity in the second half of
the year, which turned out to be unexpectedly early and strong and restored real GNP almost to its yearend 1979 level. During this period
of recovery, the public's demands on
financial markets grew and interest
rates rose as the System attempted
to hold monetary expansion within
bounds.
The financial pressures on the private sector of the economy last year
were intensified by the competition
of the federal government for the

30

Monetary Policy Reports

limited supply of credit. The federal
deficit (unified basis, including offbudget agencies) grew from $41 billion in calendar year 1979 to $83 billion in calendar year 1980. During
1980, moreover, the massive federal
deficit and repeated upward revisions
in spending forecasts added to the
prevailing mood of uncertainty and
weakened public confidence in the
government's willingness and ability
to mount a successful anti-inflation
effort.
In 1980, as in most periods of
financial tension, those types of purchases that involve longer-term investments of large sums were hardest
hit. The residential construction sector, especially, was squeezed by high
interest rates and, particularly in the
first half of the year, by reduced
credit availability. Housing starts fell
from an annual rate of 1.6 million
units in the fourth quarter of 1979
to a rate of 1.1 million units in the
second quarter of 1980; starts then
snapped back sharply to just over
1.5 million units by the end of the
summer, leveling off as interest rates
moved upward again in the final
months of the year. The mortgage
markets have seen remarkably rapid
institutional change in the past year,
reflecting an adaptation to recurrent
cyclical pressures on key lenders and
to the difficulties potential homebuyers face with traditional mortgage
instruments. Still, these changes have
not insulated the real estate market
from the effects of inflated home
prices and of high mortgage rates on
the willingness and ability of people
to borrow and buy houses.
Credit conditions also played a
role in dampening personal consumption expenditures in 1980—particularly outlays on big-ticket durable
goods. However, several other in-




fluences militated against a robust
pattern of consumer spending. The
period leading up to 1980 had been
marked by weakness in real disposable personal income and by an erosion of the financial flexibility of
households. Faced with budgetary
strains caused by relatively rapid increases in the prices of such basic
necessities as food and energy, many
American families had sought to
maintain customary consumption patterns—and in some cases to finance
extra purchases in anticipation of inflation—by borrowing. A declining
trend in the personal saving rate suggested that consumers were becoming
overextended and that some weakening in spending relative to income was
quite likely; indeed, the saving rate
rose from 4.7 percent in the fourth
quarter of 1979 (a 28-year low) to
6.2 percent in the second quarter of
1980. Automobile purchases, which
tend to be deferrable in the short run,
bore the brunt of the consumer retrenchment. Although credit conditions discouraged dealers from financing large inventories and to some
extent were a depressant on demand
for autos more generally, the steep
increases in the prices of cars and
gasoline appear to have been more
decisive elements in the picture.
Business firms, like households, entered 1980 in a weakened financial
condition. The preceding years of
expansion had seen a substantial deterioration in aggregate measures of
corporate liquidity; many enterprises
were heavily burdened with shortterm debt, and they thus were exposed to severe cash-flow pressures
when interest rates rose. The combination of deteriorating balance sheets,
a high cost of capital, and slackening
demands for final products resulted
in a 5 percent drop in real business

Monetary Policy Reports
fixed investment during 1980. Some
industries—particularly in the defense, energy, and high-technology
sectors—did register gains in capital
outlays, but those elements of strength
were more than offset by declines in
most cyclical manufacturing industries. Plant construction spending was
especially weak. Meanwhile, businesses kept a tight rein on inventories,
encouraged by the high costs of carrying stocks; a moderate accumulation
during the first-half recession—concentrated in the automotive and related industries—was largely eliminated in the subsequent rebound.
In the government sector, purchases of goods and services by the
federal government rose moderately
in real terms during 1980, reflecting
in part a pick-up in defense outlays.
At the state and local level, real purchases were about unchanged, owing
to fiscal strains associated with a
slowing of growth in tax revenues and
cutbacks in federal grants as well as
to political pressures for spending
restraint.
The slackening of domestic aggregate demand worked to hold down
imports; in the case of petroleum imports, the impact of decreased economic activity was reinforced by the
incentive for conservation provided
by a sharply increased relative price
of oil and other energy products. At
the same time, U.S. exports—including both agricultural commodities and
other products—rose appreciably in
real terms. Net exports thus registered a noticeable increase during
1980, and the U.S. current account
moved into sizable surplus in the
second half of the year. The trade
and current-account developments
contrasted sharply with those of some
other major industrial countries and
contributed to a substantial appreci-




31

ation of the dollar relative to continental European currencies over the
course of the year.
Employment traced a path similar
to that of output in 1980—that is,
down substantially in the first half and
up substantially in the second, with
little net change. There was some
alteration in the composition of employment over the course of the
year, however, with jobs in manufacturing and construction decreasing
and those in service industries increasing. The combination of this
change in employment mix and a
tendency for employers to lag in adjusting their work forces to lower
levels of production contributed to a
continued disappointing performance
of labor productivity—output per
hour worked—which showed no gain
for the year.
With no moderating influence from
the productivity side, the rise in unit
labor costs reflected directly the behavior of wages and other labor expenses during 1980. In the nonfarm
business sector, average hourly compensation—which includes employer
contributions for social insurance and
the cost of fringe benefits—rose 10
percent, a bit more than in 1979.
However, this measure, because it
does not account for changes in the
mix of employment or in overtime,
probably understates the acceleration
in wage rates. For example, the index of average hourly earnings for
production and nonsupervisory personnel, which does include adjustments for such factors, increased
9Vi percent in 1980 compared with
8 percent in 1979.
Wages typically are slow in responding to economic slack, and given
the large increases in consumer prices
in 1979 and 1980, there were strong
tendencies toward sizable catch-up

32

Monetary Policy Reports

wage hikes even in the face of an
unemployment rate that reached IV2
percent last spring. This tendency
manifests itself in a direct way when
formal cost-of-living escalator clauses
exist. Such clauses are most common
in the manufacturing sector, especially
when there is collective bargaining by
large industrial unions, and the acceleration of wage rates was in fact relatively pronounced in that sector.
The Growth of Money and Credit
in 1980
In its report to the Congress last February, the Board of Governors indicated the plans of the FOMC regarding the growth of money and credit
in 1980. As in previous years, the
FOMC set desired ranges for the
growth of several monetary aggregates and of commercial bank credit.
Measured from the fourth quarter of
1979 to the fourth quarter of 1980,
the growth ranges were as follows:
Ml-A, ZVi to 6 percent; Ml-B, 4 to
percent; M2, 6 to 9 percent; M3,
to 9Vi percent; and bank credit,
6 to 9 percent.1 It was recognized
1. Ml-A is currency plus private demand deposits at commercial banks net of
deposits due to foreign commercial banks
and official institutions. Ml-B is Ml-A
plus other checkable deposits (that is, negotiable order of withdrawal accounts, accounts subject to automatic transfer service, credit union share draft balances, and
demand deposits at mutual savings banks).
M2 is Ml-B plus savings and smalldenomination time deposits at all depository institutions, shares in money market
mutual funds, overnight repurchase agreements (RPs) issued by commercial banks,
and overnight Eurodollar deposits held by
U.S. residents at Caribbean branches of
U.S. banks. M3 is M2 plus large time deposits at all depository institutions and
term RPs issued by commercial banks and
savings and loan associations. Bank credit
is total loans and investments of commercial banks.




that legislative initiatives then pending in the area of financial regulation
could alter the desired rates of increase, as could any other unanticipated developments that indicated the
prescribed growth rates were inconsistent with the basic objectives of
policy. As stated, however, the ranges
suggested a clear deceleration of
money and credit growth from the
pace of 1979—a specification that appeared appropriate in terms of both
the near-term and long-term requirements of anti-inflation policy.
As noted in the preceding section,
the monetary and credit aggregates
grew quite rapidly in the opening part
of the year. Then, as economic activity began to fall rapidly, the growth
of money and credit slowed markedly. Indeed, the narrow monetary
aggregates, Ml-A and Ml-B, which
are measures of the public's transaction balances, actually contracted significantly in the second quarter. This
decline, occurring as it did at the
same time that interest rates were falling sharply, was considerably greater
than would have been expected on the
basis of historical relationships among
money, income, and interest rates.
The weakness in the Ml measures
tended to restrain the growth of the
broader monetary aggregates. Bank
credit meanwhile contracted slightly.
At midyear, when the FOMC reassessed the monetary growth ranges
for 1980, there were few, if any,
signs of the then-incipient economic
recovery. The monetary aggregates,
though again on the rise, were either
below or in the lower portion of the
previously announced ranges. The
Depository Institutions Deregulation
and Monetary Control Act of 1980
had been signed into law by the end
of March, but there was no clear evidence yet of significant impact on the

Monetary Policy Reports
behavior of the monetary aggregates.
In these circumstances, the FOMC
reaffirmed the ranges for money and
bank credit that it had adopted in
February, but it did indicate that, if
the public continued to economize on
the use of cash as strongly as in the
second quarter, Ml-A and Ml-B
might well finish the year near the
lower end of their respective ranges.2
Such a proviso was called for because
a sustained downward shift in the demand for money implies that a given
rate of monetary growth is more expansionary in its impact on the economy than would otherwise be the
case.
Over the second half of the year,
however, the monetary aggregates
and bank credit grew very rapidly.
There was a surprisingly swift and
strong turnaround in economic activity. And simultaneously the public's demand for money retraced most
of the evident downward shift of the
first half. Both of these developments
may have been associated with the
phasing out of the extraordinary credit
restraint program at the end of the
second quarter. In retrospect, this
program seems to have played a
greater role than was apparent at
midyear in influencing the particular
patterns of spending and financial
flows that developed in the spring
and summer.
Although the Federal Reserve resisted the accelerating growth in
money and credit—and did succeed
in bringing about a clear deceleration
2. Previous episodes had occurred, particularly in the mid-1970s, of lasting downward shifts in the demand for Ml balances
following rises in interest rates to new
record levels. Such interest rate movements evidently encouraged greater efforts
to economize on holdings of nonearning
assets.




33

in the latter months of the year—the
growth of the monetary aggregates
on a fourth-quarter-to-fourth-quarter
basis in 1980 was generally near or
a bit above the upper ends of the
ranges announced by the System.
Bank credit growth was within the
range specified by the FOMC.
Considerable care must be exercised in assessing the behavior of
Ml-A and Ml-B. Last February
when the ranges for the aggregates
were set, it was assumed that the
growth rates of the two aggregates
would differ only by V2 percentage
point based on an expectation that,
under prevailing statute, growth in
automatic transfer service (ATS)
and negotiable order of withdrawal
(NOW) accounts would draw few
funds from demand deposits (depressing Ml-A) and savings deposits
(boosting Ml-B). With the passage
of the Monetary Control Act, however, which authorized NOW accounts on a nationwide basis as of
December 31, 1980, commercial
banks began to promote ATS accounts more vigorously. As a result,
actual growth of ATS and NOW accounts substantially exceeded the
amount allowed for in the FOMC
ranges for Ml-A and Ml-B.
Ml-A increased 5 percent over the
year ended in the fourth quarter of
1980, close to the midpoint of the
FOMCs range for that aggregate.
Meanwhile, growth in Ml-B was 1V\
percent, 3A of a percentage point
above the upper end of its longer-run
range. But if the FOMCs ranges are
adjusted for current estimates of the
actual impact of shifting into ATS
and NOW accounts, the increases in
both narrow aggregates are close to
the upper bounds of the FOMCs
ranges for 1980.
Although, conventionally, fourth-

34

Monetary Policy Reports

quarter averages have been adopted
as the basis for measuring annual
growth in the money and credit aggregates, the choice is somewhat arbitrary and is only one of many possible
approaches. Moreover, citing figures
for any particular calendar period
does not necessarily give a clear sense
of the longer-term trends, which are
more relevant in assessing policy. For
that reason, the table offers measurements of annual growth on several
bases. Owing to the particular monthly patterns over the past two years,
the fourth-quarter-to-fourth-quarter
calculations show a lesser tendency
toward deceleration in the growth of
Ml-A and Ml-B than do other measurements of the 1980 experience.
Growth of Money and Bank Credit1
Percentage changes
Item

Ml-A Ml-B

M2

Bank
M3 credit

Fourth
quarter
to fourth
quarter
7.4
8.2
8.4 11.3 13.3
1978
(7.9) (8.0)
5.0
7.7
9.0
9.8 12.3
1979
(6.7) (6.8)
5.0
7.3
9.8
9.9
7.9
1980
(6.3) (6.7)
December to
December
7.1
8.2
8.3 11.2 13.6
1978
(7.8) (7.9)
5.2
7.5
8.9
9.4 11.5
1979
(6.6) (6.8)
4.1
6.5
9.7 10.3
8.9
1980
(5.2) (5.8)
Annual average to
annual
average
7.7
8.2
8.9 11.7 12.3
1978
(8.0) (8.0)
5.2
7.8
8.9 10.3 13.4
1979
(6.8) (7.0)
4.6
6.4
9.1
8.6
8.3
1980
(5.6) (5.9)
1. Numbers in parentheses are adjusted for
the estimated impact of shifting to ATS and
NOW accounts from other assets and should
give a better indication of the underlying trend
of monetary expansion.



The effects on M2 of shifting into
ATS and NOW accounts likely are
minor, since nearly all the inflows to
those instruments appear to be from
assets within this broad aggregate.
For the year as a whole, M2 grew
about 934 percent, % of a percentage
point above the upper end of the
FOMC's range. All of the growth in
the nontransaction component of M2
occurred in those assets offering
market-related yields—primarily 6month "money market certificates,"
2 V2 -year "small-saver certificates,"
and shares of money market mutual
funds. As of December, these assets
accounted for 45 percent of the nontransactional component of M2, compared with 28 percent a year earlier.
In earlier periods of high interest
rates, when such instruments did not
exist, M2 tended to decelerate markedly as disintermediation occurred,
with savers shifting funds into market
instruments. In 1980, the growing
popularity of these relatively new assets may well have drawn some funds
into M2 from market securities such
as Treasury bills, causing M2 to grow
somewhat more rapidly than in the
preceding two years and also faster
relative to Ml-B.
M3 grew almost 10 percent over
the four quarters of 1980, Vi percentage point above the upper end of its
longer-run range. Large-denomination time deposits expanded moderately at commercial banks and thrift
institutions during the year; in the
case of banks, which issue the bulk
of these instruments, the borrowing
was offset by a reduction of net liabilities to foreign branches.
Bank credit grew about 8 percent
in 1980. Fluctuations in this measure
followed the general pattern of aggregate credit flows in the economy, but
they were exaggerated by changes in

Monetary Policy Reports
the composition of business borrowing. During the first quarter, nonfinancial firms avoided long-term borrowing at record high interest rates
and turned instead to the commercial
banks for funds. In fact, they appear
to have borrowed beyond their immediate needs in anticipation of
greater credit stringency. During the
second quarter, as bond rates dropped
sharply and as banks tightened their
lending policies in response to the
special credit restraint program, corporations issued an unprecedented
volume of long-term securities and repaid outstanding bank loans. During
the summer months as interest rates
began to rise, the pattern of financing
began to reverse again, and in the

35

fourth quarter, businesses again
deferred long-term borrowing and
tapped their banks for credit.
Broader measures of credit flows in
the economy also exhibited a considerable cyclical fluctuation in 1980, as
shown in the accompanying table.
Total funds raised by all sectors of the
economy in credit and equity markets
fell by almost one-half in the second
quarter, then retraced most of that
decline in the third quarter. For the
year as a whole, aggregate funds
raised were substantially less than in
1978 and 1979. Commercial banks
provided about the same share of total
credit flowing to all sectors as in 1979,
while the share of thrift institutions
rose somewhat.

Net Funds Raised and Supplied in Credit and Equity Markets
Billions of dollars
19801
Q3
Q2

Sector

Q4*

N E T FUNDS RAISED

Total, all sectors
U.S. government
State and local government ..
Foreign
Private domestic nonfinancial
Business
Household
Domestic financial
Private intermediaries
Sponsored credit agencies .
Mortgage pool securities ••

482
54
24
32
291
128
163
81
40
23
18

483
37
16
21
321
156
165
88
36
24
28

434
79
21
30
234
133
101
70
23
24
23

497
62
21
24
303
163
140
87
32
34
21

253
67
12
35
119
79
40
20
-16
16
20

454
99
24
27
231
133
98
73
33
12
28

534
89
27
33
281
155
126
104
44
36
24

482
20
15
40
51

484
23
13
-6
81
10
71
373
308
121
56
90
41
29
28
8

435
26
20
22
29
10
19
338
285
104
57
98
26
25
23
5

498
29
18
-8
74
8*
66
385
315
117
35
103
60
40
21
9

253
30
2
47
-51
-10
-41
225
179
-2
27
108
46
6
20
20

456
24
36
22
55
22
33
319
293
129
74
93
-3
24
28
-26

534
21
23
27
39
22
17
424
353

N E T FUNDS SUPPLIED

Total, all sectors
U.S. government
State and local government —
Foreign
Private domestic nonfinancial ..
Business
Household
Domestic financial
Private intermediaries
Commercial banking
Thrift institutions
Insurance and pension funds
Other 2
Sponsored credit agencies •••
Mortgage pool securities —
Federal Reserve System

_

i

52
356
305
129
76
84
16
26
18
7

1. Seasonally adjusted annual rates.
2. Includes finance companies, money marDigitized ket FRASER estate investment trusts, openfor funds, real


end investment companies,
brokers and dealers,
p. Preliminary.

and

94
86
2
32
24
15
security

36

Monetary Policy Reports

Issues in Monetary Control
Monetary growth in 1980 was, on
balance, fairly close to the ranges specified by the FOMC. And, more important, the Federal Reserve's actions
clearly imposed a significant—and
essential—degree of restraint on the
aggregate demand for goods and services in the economy. Nonetheless,
particularly in view of the magnitude
of the short-run swings in interest
rates and financial flows in the past
year, questions have been raised—inside as well as outside the Federal
Reserve—about the techniques of implementing monetary policy and, especially, about the efficacy of the new
operating procedures adopted in October 1979. These questions have
been addressed in an intensive study
of the recent period, New Monetary
Control Procedures: Federal Reserve
Staff Study.
As a prelude to discussing the key
points raised by the staff work, it is
useful to describe in broad outline the
general approach of the Federal Reserve to monetary policy. For a number of years, monetary aggregates
have played a key role as intermediate
targets for policy, that is, as variables
standing midway in an economic chain
linking the proximate instruments of
the Federal Reserve—open market
operations, the discount window, and
reserve requirements—to the variables of ultimate concern, such as
production, employment, and prices.
Economists have debated extensively
the question of the optimal intermediate target variable, with the controversy centering on the virtues of
monetary aggregates versus interest
rates. The System historically has, in
effect, taken an eclectic view, believing that it would be remiss in ignoring
the information provided by the
movements of any financial or eco-




nomic variable. However, it has perceived a clear value in focusing special attention on the behavior of the
money stock, especially in an environment in which inflation is such a
prominent concern. A special role for
the monetary aggregates is, furthermore, dictated by the requirement of
the Humphrey-Hawkins Act that the
Federal Reserve report to the Congress on its objectives for monetary
expansion.
Analysts of all schools agree that,
over the long run, inflation cannot
persist without monetary accommodation. Thus, careful attention to the
trend of monetary expansion is an
absolutely essential feature of responsible monetary policy. In addition,
however, in a shorter-run context,
monetary aggregates are attractive as
intermediate targets because they provide a mechanism of "automatic stabilization." When the economy begins
to expand too rapidly, the associated
increase in the quantity of money
demanded for transaction purposes
comes into conflict with the monetary
target, and this results in a rise in
market rates of interest; the rise in
interest rates, in turn, damps the aggregate demand for goods and services. Similarly, if there is a recessionary impulse to the economy, the
associated reduction in the demand
for cash balances leads to an easing
of credit conditions that moderates
the impact of that impulse. Pursuit of
an interest rate target carries with it a
greater danger that an unanticipated
impulse to the economy will tend to
be fully accommodated, with greater
inflationary or recessionary consequence.
Open market operations are the
major tool of monetary control. Before October 1979, the basic approach employed by the System was

Monetary Policy Reports
to supply or absorb reserves through
open market operations with an eye
to holding short-term interest rates
—most immediately, the federal funds
rate—within a relatively narrow but
changing band thought consistent with
the desired growth of the money stock.
This method placed considerable importance on the System's ability to
predict the quantity of money the
public would wish to hold at given
interest rates. This never was an easy
matter, but in 1979, as the advance of
prices accelerated and inflationary expectations became a more significant
and volatile factor affecting economic
and financial behavior, predicting the
public's desired money holdings at
given levels of nominal interest rates
became exceedingly difficult. As a
consequence, in October the FOMC
altered its technique of monetary control, substituting the volume of bank
reserves for interest rates as the dayto-day guide in conducting open market operations.
Under the approach adopted in October 1979, the FOMC sets short-run
targets for monetary expansion, as it
did previously, to guide operations between meetings. The staff then calculates corresponding paths for various
reserve aggregates. A path for total
reserves is calculated based on the expected relationship between reserves
and the money stock—the so-called
reserves money multiplier. This relationship is variable and not known
with certainty because of the differences in reserve requirements on various components of the monetary
aggregates, which shift in relative importance from week to week; moreover, in addition to required reserves,
depository institutions also hold a
varying amount of excess reserves. A
path for nonborrowed reserves then
is calculated by making an allowance




37

for the portion of total reserves expected to be provided through borrowings at the Federal Reserve Bank
discount windows.
Between meetings of the FOMC,
the Open Market Desk focuses on
achieving a given level of nonborrowed reserves, the reserve measure
that is controllable through open
market operations on a day-to-day
basis. If the monetary aggregates
deviate from their prescribed growth
rates, the resultant movement in required reserves is reflected in an increase or decrease in borrowing at the
discount window. Owing to administrative limitations imposed by the
Federal Reserve on the frequency,
amount, and purposes of borrowing,
an increase in borrowing puts upward
pressure on the federal funds rate as
individual depository institutions bid
more aggressively in the market for
the available supply of nonborrowed
reserves in an effort to shift the need
to borrow to other institutions. A decline in borrowing has the opposite
effect. The resultant movements in
short-term interest rates induce portfolio adjustments by depository institutions and the public that tend to
move the money stock back toward
the targeted level. If it appears that
these automatic effects are not going
to be prompt enough or strong enough
—as evidenced in part by sustained
deviations in total reserves from their
path—the System can reinforce them
by making adjustments in the path for
nonborrowed reserves that increase
the upward or downward pressures on
money market interest rates. Similar
effects can be achieved through
changes in the discount rate, given
the nonborrowed reserves path.
The workings of this mechanism of
monetary control are illustrated clearly by the movements in reserves and

38

Monetary Policy Reports

interest rates during 1980. During a growing risk that downward presthe early part of the year, when the sures on the dollar might cumulate.
In a way, the Federal Reserve was
money stock was running above the
FOMC's short-run target, the volume caught in an expectational crossfire.
of adjustment credit provided by the On the one side, those who concendiscount window increased substan- trate on the money stock in assessing
tially while the amount of nonbor- policy feared that the System was berowed reserves provided through open ing too restrictive because the various
market operations declined, partly as measures of money were slowing
a consequence of reductions in the sharply or contracting; on the other,
nonborrowed reserves path to hold some of those in the financial markets
down total reserves and restrain the and elsewhere who view interest rates
growth of money over time. During as the indicator of policy feared that
this period the federal funds rate rose the System was being inflationary besharply. Restraint was intensified by cause rates were falling sharply. The
increases in the basic discount rate FOMC, in weighing the risks, decided
and the introduction in mid-March of to exercise some caution in the latter
a surcharge on frequent borrowing by part of the spring by setting its shortrun monetary growth targets with a
large banks.
As the monetary aggregates weak- view to a gradual rather than an imened in the spring, the pattern of the mediate return to the longer-range
first quarter was reversed. The Sys- path for the year.
tem countered the weakness of the
The picture soon changed dramaticaggregates by maintaining the supply ally, however, for by midsummer the
of total reserves; this required sub- monetary aggregates—buoyed by the
stantial injections of nonborrowed re- surprisingly strong turnaround in ecoserves to offset the impact of the nomic activity—were rising rapidly.
repayment of discount window bor- And as required reserves began to exrowings. The federal funds rate fell ceed nonborrowed reserves, borrowsharply.
ing and interest rates climbed. As in
The sharp plunge in interest rates, the first quarter, pressures on money
even though it occurred against a market interest rates were reinforced
backdrop of marked monetary weak- by reductions in the path for nonborness and steep recession, did arouse rowed reserves and by increases in the
concerns in some circles about the discount rate and imposition of surSystem's commitment to anti-infla- charges on frequent borrowing. Bortionary restraint. This nervousness rowing and the federal funds rate conwas evident not only in domestic fi- tinued to rise until mid-December
nancial markets but in foreign ex- when a drop in the money stock rechange markets too. By and large, lieved some of the pressure on reserve
the foreign exchange value of the dol- positions.
lar had fluctuated in a way that repThe staff study has examined the
resented a fairly direct response to the experience of 1980 in considerable
pronounced relative movement of in- detail in an effort to assess the causes
terest rates on assets denominated in of the extreme variability of money
dollars or foreign currencies. But as and interest rates in 1980 and the
U.S. interest rates reached compara- efficacy of the new reserves-oriented
tively low levels, there was a sense of operating procedure in achieving the




Monetary Policy Reports
objectives of policy. Certain key conclusions of the study may be highlighted.
1. The year 1980 was one of extraordinary variability in money and
nominal interest rates. In the case of
money, however, it is important to
note that comparisons with past years
are complicated by the fact that monetary data for those periods have been
considerably smoothed as additional
information has been obtained on
changes in seasonal patterns. If the
1980 figures are compared with the
initial figures for earlier years, the difference in monetary variability is substantially reduced. Still, after making
such allowances, it appears that
money has been somewhat more variable over the past year, especially on
a monthly or quarterly basis—though,
as far as can be judged from available
data, remaining within the range of
foreign experience with money-stock
variability.
2. Much of the variability—certainly the broad swings—in money
and interest rates since October 1979
was attributable to an unusual combination of economic circumstances
and not to the new operating procedures per se. The "real" and financial
sectors of the economy were subjected
to unusual disturbances in 1980. The
imposition and subsequent removal of
credit controls, especially, appear to
have had a major impact on the demands for money and credit and to
have strongly affected the behavior of
money and interest rates in the second
and third quarters.
3. Simulation exercises utilizing
several models of the money market
provided no clear evidence that, under
present institutional arrangements, alternative operating techniques—using, for example, total reserves or the
monetary base instead of nonbor-




39

rowed reserves as an operating target—would improve short-run monetary control.
4. Clearly, efforts to limit severely
deviations in money from its longerrun growth path would require acceptance of much more variable
short-term interest rates.
5. Short-run variability in the monetary aggregates does not appear to
involve significant impacts on the behavior of the economy. Weekly and
monthly changes in the monetary aggregates are inherently quite "noisy."
Moreover, available models suggest
that, because of the relatively long
response lags involved, sizable quarterly (or even semiannual) fluctuations in monetary growth—if offsetting—do not leave an appreciable
imprint on movements in output and
prices.
6. The federal funds rate has been
more variable since October 1979, as
would be expected with use of a reserves operating target, but in addition
very short-run fluctuations in other
market rates—both short- and longterm—also have been larger in magnitude than formerly. These rates of
interest have exhibited higher correlations than previously with movements
in the federal funds rate. The reasons
for this closer correlation between the
federal funds and other rates in the
very short run are not entirely clear,
and it is not certain that such a pattern will prevail in the future. But, in
any event, there are few signs that the
resulting variability has imposed appreciable costs in terms of reduced
efficiency of financial markets or of
increased costs of capital in the period
analyzed by the study. Considerable
difficulties arise in separating the effects of the new operating technique
from those of other factors. However,
it does appear that much of the strain

40

Monetary Policy Reports

on financial institutions and many of broad ranges of tolerance for money
the changes in financial practices ob- market interest rates—generally specserved in the past year were related to ified in terms of the federal funds
the broad cyclical pressures on inter- rate. These ranges, however, should
est rates during the year, caused by not be viewed as rigid constraints on
accelerated inflation and heightened the Open Market Desk in its pursuit
inflationary expectations, and to the of reserve paths set to achieve targeted
changes in demands for credit asso- rates of monetary growth. They have
ciated with the behavior of economic not, in practice, served as true constraints in the period since October
activity.
The FOMC has reviewed the staff's 1979, as the FOMC typically has alwork. Fundamentally, the research tered the ranges when they have besuggests that the basic operating pro- come binding. But, in a world of uncedure represents a sound approach to certainty about economic and financial
attaining the longer-run objectives set relationships, the ranges for interest
for the monetary aggregates. How- rates have served as a useful triggerever, the FOMC and the Board of ing mechanism for discussion of the
Governors will be considering the implications of current developments
practicability of modifications that for policy.
might reduce slippages between reThe reserves operating procedure
serves and money, without unduly in- —or any modification of it—needs to
creasing the risk of an unnecessarily be viewed in the context of a number
heightened variability of interest rates. of practical considerations that affect
These modifications include the possi- the basic targets for the monetary agbility of prompter adjustment of non- gregates and the process of attaining
borrowed reserve paths or of the them. First, targets need to recognize
discount rate at times when, in asso- the lags in the adjustment of wages
ciation with undesired movements in and prices that may limit the speed
money, the levels of borrowing and, with which noninflationary rates of
consequently, of total reserves are monetary expansion can be attained
running persistently stronger or weak- without unduly restraining economic
er than projected. In addition, the activity. Second, the potential for
Board of Governors has already indi- costly disturbances in domestic financated its inclination to switch from cial or foreign exchange markets may
the present system of lagged reserve occasionally require short-run deparaccounting to a system in which re- tures from longer-run monetary tarquired reserves are posted essentially gets. Third, precise month-by-month
at the same time as deposits; it is con- control of money is not possible, nor
tinuing to study the practical merits is it necessary in terms of achieving
of such a system to ensure that the desirable economic performance. Fioperating problems created for de- nally, uncertainties about the relationpository institutions and the Federal ship between money and economic
Reserve and the potentially increased performance suggest the desirability
volatility of the federal funds rate of a degree offlexibilityin the targets
would not outweigh the possible bene- —including the use of ranges for more
fits in terms of tighter short-run than one measure of money—and the
monetary control.
potential need to alter previously
The FOMC has continued to set established targets.




Monetary Policy Reports

41

forces. The growth of money and
credit will have to be slowed to a rate
consistent with the long-range growth
of the nation's capacity to produce at
The Federal Reserve's Objectives
reasonably stable prices. Realistically,
for the Growth of Money and Credit
In its midyear report last July, the given the structure of the economy,
Federal Reserve indicated to the Con- with the rigidities of contractual relagress that its policy in 1981 would be tionships and the natural lags in the
designed to maintain restraint on the adjustment process, that rate will have
expansion of money and credit. Noth- to be approached over a period of
ing has occurred in the intervening years if severe contractionary presmonths to suggest the desirability of a sures on output and employment are
change in that basic direction. Events to be avoided.
have only served to underscore the
The ranges of monetary expansion
importance of such a policy—and of specified this month by the FOMC for
complementary restraint in the fiscal the year ending in the fourth quarter
dimension of federal policy as well.
of 1981 reflect these considerations.
Few would question today the viru- They imply a significant deceleration
lence of the inflation that is afflicting of growth in the monetary aggregates
the economy or the urgency of mount- from the rates observed in 1980 and
ing an effective attack on the forces other recent years. The ranges are as
that are sustaining inflation. The follows: for Ml-A, 3 to 5Vi percent;
rapid rise of prices is the single great- for Ml-B, ZVi to 6 percent; for M2,
est barrier to the achievement of bal- 62 to 9 percent; and for M3, 6V2 to
anced economic growth, high em- 9 /2 percent. It should be emphaployment, domestic and international sized that, owing to the introduction
financial stability, and sustained pros- of NOW accounts on a nationwide
perity. The experience of the past basis at the end of 1980, the monetary
year—the stresses and dislocations ranges have been specified on a basis
that have occurred—attests to the dif- that abstracts from the impact of the
ficulty of dealing with inflationary shifting of funds into interest-bearing
trends that have been many years in checkable deposits; only by adjusting
the making, but it does not indicate for the distorting effects of such shifts
that there is any less need to do so. can one obtain a meaningful measure
Indeed, the need has become more ur- of monetary growth. The FOMC also
gent, for as price increases continue, adopted a corresponding range of 6 to
the public's expectations of inflation 9 percent for commercial bank credit.
The ranges for Ml-A and Ml-B
become more and more firmly embedded, and those expectations in turn are V2 percentage point less than those
contribute to the stubborn upward the Federal Reserve sought in 1980.
Since realized growth last year, after
momentum of wages and prices.
Persistent monetary discipline is a adjustment for the impact of shifting
necessary ingredient in any effort to into interest-bearing checkable derestore stability in the general price posits, was close to the upper ends of
level. To be sure, other areas of pol- the stated ranges for the period, the
icy are also important, but it is essen- new ranges are consistent with a detial that monetary policy exert con- celeration of considerably more than
tinuing resistance to inflationary V2 percentage point.
Monetary Policy and the Prospects
for the Economy in 1981




42

Monetary Policy Reports

The actual observed changes in
Ml-A and Ml-B will differ by a wide
margin; in fact, it is quite possible
that, because of the movement of
funds from demand deposits to NOW
accounts, Ml-A could contract this
year, while Ml-B could grow more
rapidly in reflection of funds moving
into NOW accounts from savings deposits and other assets. It must be
stressed that valid comparison of actual year-to-year growth has to allow
for this institutional change.
The behavior of Ml-A and Ml-B
thus far this year has reflected this
pattern, but in an exaggerated degree
because of the large initial transfer of
funds to NOW accounts. The next
section discusses in some detail the
distortions caused by shifting to NOW
accounts and the expected behavior of
Ml-A and Ml-B. As the discussion
indicates, any estimates of the extent
and character of the prospective shift
into NOW accounts must be tentative.
The Federal Reserve will be monitoring the shifting into interest-bearing
checkable deposits as the year progresses and will be assessing its impact
on the expansion of the monetary aggregates. From time to time, the System will report its estimates of the adjusted growth of Ml-A and Ml-B so
that the public and the Congress can
better assess the consistency of monetary expansion with the FOMC's
stated objectives.
The 1981 range for M2 is the same
as that in 1980; however, the upper
end of the range is roughly % percentage point less than the actual
growth recorded in 1980. A reduction
in the range does not appear appropriate at this time in light of what is
known about the relationships among
the various monetary measures, as affected by public preferences for various types of assets and by expected




economic and institutional circumstances. In fact, there is a distinct
likelihood that, consistent with the
planned decline in the growth of the
narrower aggregates, growth in M2 in
1981 will be in the upper half of its
6 to 9 percent range. With the changes
in regulatory ceilings that have made
small-denomination time deposits
more attractive in comparison to market instruments and with the growing
popularity of money market mutual
funds, the nontransactional component of M2 is likely to continue growing quite briskly. Moreover, if the tax
cuts proposed by the President result
in a marked increase in the proportion
of income saved, this saving may contribute to relatively robust growth in
M2, which has, in any event, tended
in recent years to approximate the increase in nominal GNP.
The range for M3 in 1981 is the
same as that for 1980, but again is
below the actual growth experienced
last year. The deceleration would reflect the slower expansion specified
for M2, which accounts for more than
three-quarters of the broader aggregate. Large-denomination time deposits at commercial banks—the other
major component of M3—likely will
expand moderately again this year,
but much will depend on the patterns
of credit flows that emerge. The
growth of bank credit is now expected
to be about the same as in 1980.
Household borrowing at banks could
increase, especially in the consumer
installment area, where use of credit
was severely damped for a time last
year by credit controls. However,
nonfinancial firms likely will wish to
rely less heavily on bank borrowing
than they did in 1980, in light of the
deterioration of balance-sheet liquidity that they have already experienced. Indeed, should credit market

Monetary Policy Reports
conditions be such as to encourage a
substantial funding of short-term debt
by corporations, commercial banks
might play a lesser role in the overall
supply of credit and M3 could be
damped by reduced bank reliance on
large time deposits. On the other
hand, if conditions in the bond markets are not conducive to long-term
financing, then bank credit and M3
could be relatively strong.
Impact of Nationwide NOW Accounts
on Monetary Growth in 1981
As noted in the preceding section, the
behavior of Ml-A and Ml-B will be
greatly affected this year by the advent, under the Monetary Control Act
of 1980, of nationwide availability of
NOW accounts and other interestbearing checkable deposits. The phenomenon is qualitatively similar to
what occurred in 1980 when growth
in Ml-A was depressed and growth in
Ml-B enhanced by the shifting of
funds into ATS accounts—but the
distortions in 1981 will be quantitatively much greater.
With the introduction of a new
financial instrument like the NOW account, a broad adjustment of the public's asset portfolios may occur. Under
the present circumstances, however, it
seems reasonable as a practical matter
to expect that the major impact will
be a shifting of funds into the new
accounts from existing nonearning demand deposits and from the interest-earning assets included in M2
(especially highly liquid, relatively
low-yielding savings deposits). The
analysis of experience in past years
with NOW accounts in the northeastern part of the country and with ATS
accounts throughout the nation indicates thatflowsfrom demand and savings deposits have accounted for the
great bulk of the growth of interest-




43

bearing accounts. Furthermore, various surveys and other analyses have
indicated that in the past roughly twothirds of the funds flowing into ATS
and NOW accounts have come from
demand deposits and roughly onethird from savings deposits.
During January, a somewhat larger
share of the funds flowing into interest-bearing checking deposits appears
to have come from demand deposits
—perhaps about 75 to 80 percent,
with only about 20 to 25 percent
coming from savings deposits (or, to
a very limited extent, other sources).
This change from past patterns appears to reflect a relatively fast adjustment on the part of holders of
large-denomination demand deposit
balances at commercial banks. The
sources of subsequent growth in interest-bearing checkable deposits are expected to be more along the lines of
the past two-thirds-one-third break.
Depository institutions have marketed the new accounts very aggressively, many of them lining up a sizable number of customers before the
end of 1980. Since December 30, the
net growth of interest-bearing checkable deposits already has totaled more
than $22 billion. Obviously it is extremely difficult to forecast the further
growth of interest-bearing checkable
deposits over the remainder of the
year. A working assumption would
be that the net increase in such deposits this year will amount to somewhere between $35 billion to $45 billion, which would mean that half, or
a little more than half, of the funds
already have been shifted. If the
shares of funds coming from demand
and savings deposits move promptly
to a two-thirds-one-third proportion,
the result will be a depressing effect
on Ml-A growth of 7 to 8 percentage
points and an increase of 2 to 3 per-

44

Monetary Policy Reports

centage points in Ml-B growth. Taking the midpoints of these estimates
and applying them to the basic ranges
specified by the FOMC for monetary
growth this year, the observed change
in Ml-A from the fourth quarter of
1980 to the fourth quarter of 1981
would be — AV2 to —2 percent and
that in Ml-B would be 6 to 8V2
percent.
As already indicated, the growth of
interest-bearing checkable deposits in
January was extraordinarily rapid and
resulted in an extreme divergence of
Ml-A and Ml-B movements. Observed Ml-A contracted at a 37Vi
percent annual rate in January, while
Ml-B increased at a 12V4 percent annual rate. On the assumption that
three-quarters to four-fifths of the
funds flowing into interest-bearing
checkable deposits came from demand
deposits, both Ml-A and Ml-B, on
an adjusted basis, showed only small
growth in the early weeks of this year.
Outlook for the Economy
The economy entered 1981 on an upward trajectory, extending the recovery in activity from last year's brief
but sharp recession. January saw further large gains in retail sales, employment, and industrial production. On
the whole, the demand for goods and
services has continued to prove more
buoyant than most analysts had expected. Unfortunately, at the same
time inflation has not abated.
The persistence of intense inflationary pressures jeopardizes the continuity of economic expansion over the
remainder of the year. Moreover, unless the rise of prices slows, there can
be little hope of an appreciable, sustained easing of interest rates or of a
substantial improvement in the balance sheets of the many units of the
economy that already have experi-




enced a deterioration in their financial
condition.
The near-term prospects for prices
are not favorable. In the months immediately ahead, the major price indexes will reflect the effect of poor
agricultural supply conditions on food
prices and the impact of higher OPEC
charges and domestic decontrol on
energy prices. Increases in the consumer price index, furthermore, will
reflect—in a way that exaggerates the
true change in the average cost of living—the rise in mortgage interest
rates that occurred in the latter part
of 1980.
Aside from these special factors,
the basic trend of prices is linked
closely to the behavior of unit labor
costs, which constitute the largest element in costs of production. As noted
earlier, poor productivity performance
has contributed to rising costs. It is
also quite clear that wage demands
have been sizable. Despite the acceleration in wage increases that has
occurred, the wages of many workers
have failed to keep pace with the upward movement of prices in the past
few years. This development was virtually inevitable in light of the decline
in productivity and the adverse termsof-trade effects of the tremendous increase in foreign oil prices. So long
as those conditions continue, the average worker cannot anticipate a rising
standard of living, and attempts to
"make up" losses in real income will
be reflected in strong cost and price
pressures.
The condition of labor markets is,
of course, a factor affecting wage decisions. Despite the fact that the overall unemployment rate stands at IV2
percent, scarcities of skilled workers
have occurred in some sectors of the
economy. But, even when slack in
labor demand does exist, its impact

Monetary Policy Reports
on wages is rather slow in emerging;
wages appear to have a strong momentum rooted in inflationary expectations, which are based to a great
extent on past experience as well as
on attempts to maintain real income.
Workers' wage demands are influenced by expectations about prices,
as well as by patterns established in
previous wage bargaining. Meanwhile, employers condition their wage
offers in good measure by their own
sense of the prospects for inflation
and of whether they will be able to
pass along higher compensation costs
by increasing prices.
This momentum must be turned in
a favorable direction. To do so will
require a commitment to monetary
and fiscal restraint that is firm and
credible, and a direction of other governmental policies toward fighting inflation. Labor and management must
be persuaded that the inflationary
process will not be accommodated—
that wage and price decisions based
on an anticipation of rapid inflation
will prove inimical to their ability to
maintain employment and sales volume. Put more positively, they have
to be convinced that moderation in
their individual wage and price actions will not put them at a relative
disadvantage and will in fact produce
a better economic environment for
everyone.
Such an alteration of the expectational climate will not be easy to
achieve. But it is important to do so.
For, to the extent that those attitudes
can be changed, the short-run costs of
restraint on aggregate demand, in the
form of economic slack, will be ameliorated. Conversely, prolongation of
high wage and price demands would
come into conflict with needed monetary and fiscal restraint, aggravating
economic difficulties. In any event,




45

once expectations are turned, further
progress toward price stability should
come more easily so long as excessive
pressures on productive capacity are
avoided.
The policy of monetary restraint
adopted by the Federal Reserve is intended to contribute to the process of
breaking the momentum of inflation.
Fiscal policy also has a crucial role to
play. Cuts in federal taxes potentially
can help to invigorate private capital
formation and thereby enhance productivity, reduce costs, and pave the
way for faster economic growth. But
it is important that government spending be held firmly in check at the same
time so that aggregate demand does
not become excessive and so that the
pressures of government demands on
the credit markets do not impede the
financing of private investment.
The members of the FOMC, in assessing the economic outlook, have
recognized the possibility of some reduction this year in business and personal income taxes and some initial
steps in the longer-range effort toward
slowing the growth of federal expenditures. Given these working assumptions, the individual members of the
FOMC have formulated projections
for economic performance in the current year that generally fall within the
ranges indicated in the accompanying
table. As may be seen, the FOMC
members' projections for output and
inflation encompass those that underlie the administration's recent budget
proposal.
The members of the FOMC see inflation as remaining rapid in 1981, although not so rapid throughout the
year as seems likely to be the case
early in the period. The failure of
inflation to slow more quickly and the
large budgetary deficits in prospect
for the year are seen as resulting in

46

Monetary Policy Reports

strated in recent years. Deeply embedded expectations of inflation have
created serious imbalances in financial markets, distorted spending patterns throughout the economy, and
Changes from
imparted a strong upward momentum
fourth
to wages and prices. At the same
quarter to
fourth
time, productivity growth has slowed
quarter,
percent
markedly, and the unemployment
9.5
9 to 12
11.0
Nominal GNP .
rate has remained consistently high
Real GNP
- . 3 -IV* to 1*4
1.4
GNP deflator .
9.8
9 to 10*4 9.5
by historical standards. Dealing with
Average level in
the inflation problem, with all its
fourth
quarter,
difficulties, is essential if we are to
percent
provide a solid base for sustained
Unemployment
7.5
8 to 8V4 7.7
rate
growth, lower unemployment, and
continued strong demands for money higher productivity, goals central to
and credit and in the maintenance of the Humphrey-Hawkins Act.
The reduced rate of increase in
relatively high interest rates. Against
this backdrop, economic activity is prices this year has reflected, in sublikely to show only intermittent stantial part, developments in the
strength, and unemployment prob- food and energy sectors. Sensitive
ably will rise between now and the commodity prices, more broadly,
have been restrained by the high cost
end of the year.
of credit and reduced speculative interest. In short time periods, howReport on July 20,1981
ever, prices in these sectors can be
Federal Reserve Policy and the
greatly influenced by developments
Outlook for 1981 and 1982
only tangentially related to broader
The Objectives of Monetary Policy
trends in the economy and can be
The Federal Reserve reported to the quite volatile. The underlying inflaCongress in February that the prin- tionary tendencies in the economy
cipal objective for monetary policy in generally are better captured by
1981 would be to exert continuing trends in labor costs—the largest eleresistance to inflationary forces. This ment in production costs for both
goal requires gradual reductions over goods and services. While unit labor
time in the expansion of money and costs have shown scattered and tencredit to rates consistent with sustain- tative indications of some moderation
able growth in output at reasonably in their rise, their advance remains
stable prices. Signs of a deceleration rapid.
in broad price measures this year are
One key element in slowing the
encouraging. Nonetheless, inflation- rise in costs is avoiding excessive
ary forces are still well entrenched, pressures on productive capacity.
and the Federal Reserve must remain Restraint on growth of money and
firmly committed to a policy of mone- credit helps to prevent such prestary restraint.
sures. But the process of slowing
The persistence of inflation and the inflation through monetary restraint
extraordinary costs it imposes on the can entail strains on particular marDigitizedeconomy have been widely demon- kets and sectors of the economy, esfor FRASER
Economic Projections for 1981



pecially when so much of the task of
dealing with inflation rests on monetary policy. As long as strong demands for money and credit persist
and inflationary expectations remain
intense, restrained monetary growth
may be accompanied by high interest
rates and considerable financial stress.
These financial strains impose particular hardships on industries that
depend heavily on credit markets
such as construction, consumer durable goods, and business equipment.
Most obviously, the thrift institutions
are experiencing severe pressures on
earnings and reduced inflows of deposits. More generally, the recent inflation, combined with a long period
of relatively slow growth in activity,
has distorted the balance sheets of
many businesses and individuals,
leaving them more vulnerable to adverse financial and economic developments.
Lasting relief from these financial
pressures will be dependent on success in dealing with the inflation that
lies at the root of the problem. Monetary stimulus can encourage, at best,
only short-lived declines in interest
rates and would without question sustain or aggravate underlying inflationary forces. The only effective
way to bring down interest rates and
restore financial stability is through
the sustained pursuit of anti-inflation
policies. The more quickly inflationary forces are defused, the greater
the potential for a sustained easing
in credit market conditions and a
return to more satisfactory production and employment growth.
Disciplined money policy is an
essential element in the effort to damp
inflationary forces. Progress in this
direction will be speeded and the
near-term hardships minimized if
Digitizedother government policies complefor FRASER


Monetary Policy Reports

47

ment the efforts of the monetary
authority. As businesses and wage
earners become convinced that the
government is committed to slowing
the rise in prices, expectations of
inflation will have a lessening impact
on the determination of wages, interest rates, and prices. In this regard, the stance of fiscal policy is
of particular importance. Assurance
that growth in federal expenditures
will be limited and that the budget
will move toward balance will reinforce the effectiveness of monetary
restraint and help relieve pressures
on financial markets.
The Growth of Money and Credit
The targeted ranges of growth for the
monetary aggregates announced in
February anticipated a deceleration in
monetary growth. Measured from
the fourth quarter of 1980 to the
fourth quarter of 1981, and abstracting from the effects of the authorization of negotiable order of withdrawal
(NOW) accounts nationwide, the
ranges adopted were as follows: for
Ml-A, 3 to 5Vi percent; for Ml-B,
3Vi to 6 percent; for M2, 6 to 9
percent; and for M3, 6Vi to 9Vi percent. The corresponding range for
commercial bank credit was 6 to 9
percent.
The monetary aggregates have
shown disparate patterns of growth
so far this year. The narrow aggregates, after adjusting for the newly
authorized NOW accounts, have fallen short of their ranges. At the
same time, M2 growth has been at
the upper limit of its range, while
M3 has exceeded the upper end of
its range. The divergent behavior of
the aggregates is symptomatic of the
rapid structural changes that are
under way in financial markets in
response to high and volatile interest

48

Monetary Policy Reports

rates and to an evolving regulatory
environment.
Recently, the most prominent
structural development affecting the
measured aggregates has been the
introduction at the end of 1980 of
NOW accounts nationwide. As expected, there have been major shifts
of funds into NOW accounts from
conventional checking accounts included in Ml-A and from interestearning assets included in M2. Consequently, the Federal Reserve is
publishing estimates of Ml-A and
Ml-B that are adjusted for these
shifts in order to facilitate comparisons with earlier years. Through
June, these adjustments have had the
effect of raising Ml-A by $28 billion
and lowering Ml-B by $10 billion.
Shifts into NOW accounts were particularly large early in the year, reflecting the rapid response by individuals with large demand deposit
balances. Over the past two months,
in contrast, the shift adjustments have
been negligible, as outflows from
NOW accounts have been small.
These outflows probably do not signal
the end of the NOW account buildup.
The record in New England, where
NOW accounts were introduced some
time ago, suggests that the process
of adjustment has further to go. Also,
a recent survey indicates that individuals are continuing to open NOW
accounts, though at a much reduced
pace from earlier in the year. Even
so, the adjusted and unadjusted data
are likely to continue to move much
more closely together than in the
early months of the year.
The shift adjustments published by
the Federal Reserve have attempted
to correct for one important distorting influence on the narrow aggregates. After taking account of these
Digitizedadjustments, Ml-A and Ml-B so far
for FRASER


this year have been low relative to
their past relationships to income and
interest rates. For example, despite
the rapid growth in nominal income
over the first half of 1981, shiftadjusted Ml-B expanded at an annual rate of only 2XA percent from
the fourth quarter of 1980 to the
second quarter of 1981. This was less
than half the rate at which Ml-B
grew in 1980 even after allowing for
the shift into automatic transfer service (ATS) and related accounts last
year. In the first quarter especially,
growth in adjusted Ml-B was well
below what would have been expected
on the basis of average historical relationships among money, income, and
interest rates. Relatively low growth
in transaction balances has occurred
on occasion when interest rates have
reached new highs, such as happened
at the turn of the year. In addition,
the introduction of NOW accounts
may have stimulated a general reconsideration of alternative deposit and
nondeposit instruments and thereby
have intensified the response to the
peak in rates.
Indeed, at the same time that the
narrow aggregates have been unusually weak, the broader aggregates in
the first half of 1981 have been at or
above the upper limits of their specified ranges. Instruments that offer
market-determined yields have continued to grow rapidly, insulating M2
from the damping effects of rising
interest rates by encouraging investors to keep their funds in financial
intermediaries rather than shifting
into open market securities. The
growth of money market mutual
funds has been particularly rapid,
averaging about 125 percent at an
annual rate from December 1980 to
June 1981; this growth accounted for
60 percent of the increase in the non-

Monetary Policy Reports
transaction component of M2. While
available data do not permit accurate
estimates, the exceptionally rapid
growth in these funds, which at least
in limited part are used as transaction
balances, may have lowered growth
in recorded Ml-B somewhat. To the
extent that money market mutual
funds attracted funds from the open
market, the effect was higher M2
and M3.
Thus far this year, growth of M3
has averaged llVi percent at an
annual rate—about \VA percentage
points faster than last year and 2 percentage points more than the growth
of M2. Large-denomination certificates of deposit, which are the main
additional instruments included in
M3, have been growing strongly, reflecting the need for depository institutions to expand their managed liabilities to offset the weakness in their
core deposits. In addition, M3 appears to have been influenced by
changing patterns of transactions
between U.S. banks and their foreign
branches.
Over the first half of 1981, commercial bank credit grew on balance
at a rate a bit below the upper limit
of its range for 1981. Loan growth
was strong early in the year but soon
tapered off. With the prime rate
lagging behind the drop in market
rates, business loan growth showed a
particularly sharp deceleration, as
corporations switched much of their
borrowing to the commercial paper
and bond markets. Later in the
spring, however, business loan growth
picked up again, as bond rates moved
to all-time highs. Real estate loans
have shown a more even pattern of
growth, sustaining their moderate
1980 rate of increase, while consumer
loans outstanding have continued to
edge down this year. Security hold-




49

ings at banks have grown somewhat
faster than loans over the first half of
1981, with the bulk of the increase
accounted for by U.S. government obligations. So far this year, bank credit
growth has been almost 3 percentage
points slower than M3 growth. This
divergence between the increase in
bank asset portfolios and the expansion in M3—which includes most
bank liabilities—mainly reflects the
large increase in money market mutual funds; much of the inflow to
money funds was channeled into
commercial paper and other nonbank
instruments.
At its meeting in July, the Federal
Open Market Committee (FOMC)
reassessed the ranges it had adopted
for money growth in 1981 and formulated preliminary objectives for
1982. In the light of all the circumstances, the FOMC elected to retain
the previously established ranges for
the monetary aggregates over the remainder of 1981. In doing so, the
FOMC recognized that the shortfall
in Ml-B growth in the first half of
the year probably reflected in part
some shifting of transaction balances
included in Ml-B into other highly
liquid assets; in light of that pattern
and the desire to moderate growth in
money, the FOMC contemplates that
growth in the narrow aggregates, adjusted for shifting into NOW accounts, over the year as a whole may
be near the lower ends of their annual
ranges. Growth in the broader aggregates, on the other hand, has been
running at the top or somewhat above
the upper ends of their ranges, and
given their behavior in the first half
of the year, may be toward the upper
part of their ranges for the year as a
whole.
As indicated, the nontransaction
components of M2 that offer market-

50

Monetary Policy Reports

determined rates have been growing
vigorously, apparently in part at the
expense of market instruments not
included in the aggregates. Moreover, the attractiveness of the smalldenomination, time deposit component of M2 recently was enhanced by
the decision effective August 1 to
uncap the ceiling on "small saver
certificates" with maturities of two
and one-half years or longer and to
remove ceilings entirely on small time
deposits with initial maturities of four
years or more.
In the context of sluggish growth
of profits and an expanding need for
external financing, business loan demands seem likely to remain relatively strong, though a surge in longterm financing could reduce business
borrowing at banks if bond rates were
to fall. Other components of bank
credit are expected to continue recent
trends, with real estate loans showing
moderate growth and consumer lending remaining weak. While total bank
credit is subject to considerable shortrun fluctuation, the 6 to 9 percent
range for its growth in 1981 remains
appropriate.
Looking ahead to 1982 and beyond, the FOMC remains committed
to reducing the growth of money to a
rate consistent with noninflationary
economic growth. The speed with
which monetary expansion can be
reduced without large short-run effects on production and employment
will depend critically on the forces
bearing on inflation and credit market
demands, including the fiscal position
of the government. Also, during a
time of rapid institutional change,
monetary targets must be chosen with
close attention to how such change
may affect particular aggregates and
the relationships among them. In this
Digitizedregard, looking toward completion of
for FRASER


the major shift into NOW accounts,
the FOMC now intends to target a
single Ml figure in 1982 with the
same coverage as the present Ml-B.
Assuming that shifts into NOW accounts from nontransaction balances
are small by that time, a separate
shift-adjusted figure would not be
necessary.
Reflecting the intent to reduce
growth in money over time, the
FOMC tentatively agreed on an Ml
range of V/i to 5V6 percent for 1982.
This would involve reductions in the
upper and lower ends of the range for
Ml-B (as shift adjusted in 1981) of
Vi and 1 percentage point respectively. The growth ranges for M2 and
M3 would be left unchanged from
those in effect for 1981, a specification that would be fully consistent
with a reduction in the actual growth
of those aggregates in 1982. Thus,
the tentative ranges for the broader
aggregates in 1982 are as follows:
for M2, 6 to 9 percent, and for M3,
6V2 to W2 percent. The associated
range for bank credit would remain at
6 to 9 percent.
While the level of the range for Ml
is a reduction from the Ml-B range
for 1981, it also is widened by Vi percentage point. Interest-bearing transaction accounts are in the process of
becoming a sizable component of
Ml-B. To a certain degree, those
accounts have a greater savings component for individuals than noninterest-bearing demand accounts. Because of the changed composition of
this component, some time will have
to elapse before the behavior of Ml
with this component can be related
with confidence to changing economic and financial circumstances. Moreover, when this shift in composition
will end is also uncertain. At present,
we are assuming that the great bulk of

Monetary Policy Reports
the growth in NOW accounts will
have been completed by the end of
1981, with only a small amount of
funds continuing to be shifted from
nontransaction balances. A firmer
judgment about the transition can be
made, of course, in light of added
experience when the 1982 targets are
reevaluated early next year.
The decision to leave unchanged
the ranges for M2 and M3 reflects in
part the likelihood that the proportion
of credit demand financed through
depository institutions rather than
market instruments will be modestly
increased by the trend toward reduced regulatory constraints. Actual
growth in the broader aggregates is
expected to fall somewhat lower in
their ranges than in 1981.
The Outlook for the Economy
The economy entered 1981 on a
sharp upward trajectory, but apparently little further growth in activity
has occurred since early in the year.
Auto sales fell with the termination
of price concessions this spring, and
real retail sales excluding autos have
declined in the second quarter. Housing construction activity also has
slackened appreciably, while business spending for capital goods
apparently has edged down after
allowing for inflation. Preliminary
estimates suggest that real gross national product showed no increase in
the second quarter, and it now appears that economic activity will remain sluggish at least in the near
term.
In the investment sectors, the
weakness in residential construction
likely will persist for some time. Declines in housing starts, such as occurred in the first half, typically are
reflected with a lag in reduced conDigitizedstruction activity. Thus, even if marfor FRASER


51

ket interest rates should ease soon,
homebuilding would tend to be sluggish for a while. Business fixed investment also displays some signs of
weakening, although energy remains
a strong sector. Contracts for business construction and orders for new
equipment have been on a downtrend
in real terms. In addition, the Commerce Department's survey of capital
spending intentions indicates that, for
the second time this year, firms have
scaled back their expected outlays,
and at present their spending plans
imply almost no growth in real terms
for 1981 as a whole.
Consumers also may hold down
spending in response to slower
growth in real income and to indications that finding or retaining a job
may become more difficult as the
year progresses. Recent surveys indicate that some retrenchment has
taken place in anticipated expenditures for consumer goods by households, in part owing to concerns
about restrictive credit conditions.
The recent appreciation of the
dollar, combined with only moderate
economic growth abroad, points to a
slowing in the growth of exports.
Over coming quarters, the real volume of exports could well decline a
bit.
Government expenditures in real
terms should rise relatively little.
Outside the defense area, spending
by the federal government is expected to contract in real terms,
based on proposed budget cuts for
fiscal year 1982. And state and local
governments currently are seeking
ways to curb expenditures in response
to reduced income from federal grants
and to slower growth in tax receipts.
Some stimulus to private sector demands would be provided by the reductions in personal and business

52

Monetary Policy Reports

taxes now under consideration by the
Congress; however, at this time most
of the impact of the proposed tax cuts
seemingly would affect private markets in the second half of 1982.
While the near-term outlook suggests aflateconomy, it is more difficult
to foresee the path of developments in
1982. A crucial element affecting this
outlook is the speed with which progress is made in reducing inflation. As
noted earlier, some slowing has occurred in the rate of inflation thus far
this year, and the near-term outlook
is that prices will continue to rise at a
more moderate pace than last year.
The recent decline in food prices
probably will be reversed in the second half of 1981 in response to tightening supply conditions in some areas.
But other factors should work to offset these movements. In particular,
the current weakness in world oil
markets appears to militate against
any substantial rise in petroleum
prices over the next few quarters.
Also, the increase in the foreign exchange value of the dollar since the
end of last year, unless reversed,
should further reduce domestic price
pressures.
The pace of wage increases has
abated only a little despite relatively
high levels of unemployment. The
rapid increases in consumer prices in
1980 have been a factor in large upward wage adjustments this year, as
workers have attempted to recapture
losses of real income. Strong productivity gains, such as occurred in the
first quarter of this year, can hold
down unit labor costs even when
nominal wages rise rapidly. But a
sluggish pattern of activity, such as is
anticipated for the remainder of this
year, is likely to be associated with
small productivity gains, suggesting
relatively little alleviation of labor




cost pressures in the period immediately ahead.
The members of the FOMC, in assessing the economic outlook, have
formulated projections for economic
performance in the current year and
in 1982 that fall within the ranges indicated in the accompanying table. In
Economic Forecasts of the FOMC
Item

Actual
1980

Projected
1982
1981

Change from
fourth quarter to fourth
quarter,
percent
Nominal GNP .. 9.4 10toll 1 /! 9*4 to 12*4
Real GNP
-.3
1 to 31/2
Ito4
Implicit GNP
deflator —
Average level in
fourth
9.8 IVi to 9
6V2 to 8V2
quarter
Unemployment
rate
(percent)

addition to the 7.5 IV2 to 8V4 7 to rate
monetary growth 8V2
targets, the principal assumptions underlying these projections are that
there will be a cut in business and
personal income taxes, most of which
occurs in 1982, and that growth of
federal expenditures will slow.
Most of the members believe that
economic growth will remain sluggish
in the second half of this year, resulting in some further rise in the unemployment rate by year-end. The outlook for 1982 reflects the broad range
of views among members of the
FOMC about the pace at which the
rate of inflation will be reduced.
While most expect growth in nominal
gross national product to slow somewhat next year, views on how the
composition of expenditures will be
divided between prices and output
are less uniform.
The administration, in association
with its mid-year budget review, has

Monetary Policy Reports
updated its forecast of the behavior
of major economic variables for 1981
and 1982, as shown in the accompanying table.
The Administration's Forecast
Item

1981

1982

Change from fourth quarter to fourth quarter;
percent
Nominal GNP
Real GNP
Implicit price deflator ...

11.8
2.5
9.1

12.9
5.2
7.3

7.7

7.0

Average level in fourth
quarter
Unemployment rate
(percent)

As compared with the projections
of FOMC members, the administration's forecast for 1982 indicates a
greater expansion in nominal GNP.
The forecast for the GNP deflator is
within the range indicated by Committee members, but real growth is
higher. Such an outcome would seem
to depend on a substantial rebound in
productivity in the wake of the tax
and regulatory changes now in prospect, and, relative to historical experience, on a considerable willingness
by the public to economize on cash
balances in response to continuing
changes in financial technology and
other factors.
A Review of Recent Economic and
Financial Developments
Economic Activity
during the First Half of 1981
The snapback from last year's brief
but sharp recession carried into the
early part of 1981; however, the economy clearly lost its upward momentum during the first quarter. Over the
past several months, activity has been
about unchanged on balance. The
initial strength of aggregate demand
this year was centered in consumer




53

durable outlays and business fixed investment. Spending in these sectors
began the year on a strong uptrend
and was bolstered for a time by the
various automobile price concessions.
In recent months, however, spending
for consumer and business capital
goods has flattened out. At the same
time, residential construction activity
weakened in response to rising mortgage rates, after having been aided
this winter by comparatively moderate
weather. Inventories appear to be
under good control, except for autos,
as highfinancingcosts have reinforced
the continuing desire of businesses to
maintain lean stocks.
Unexpectedly favorable developments in volatile food and energy
prices played a major role in a noticeable moderation of the broad measures of inflation during the first half.
Nonetheless, some limited evidence of
a slowing in underlying cost pressures
was apparent. Unit labor costs advanced less quickly in the first quarter
than over last year, reflecting a spurt
in productivity growth. The moderation in unit labor costs appears to
have continued this spring, as wage
increases slowed in a few sectors. The
marked appreciation of the dollar in
exchange markets also began to reduce inflationary pressures through
the lowering of import prices and the
associated competitive restraint on
domestic prices.
Personal consumption expenditures.
Consumer outlays rose sharply early
in the year, with strength concentrated in spending for relatively discretionary items such as autos, furniture and appliances, and apparel. This
increase in spending was associated
with a reduction in the personal saving rate to its lowest level in nearly
30 years. In part, the willingness of
consumers to save less and to borrow

54

Monetary Policy Reports

more may have reflected the reduction in their debt burdens that occurred last year in conjunction with
the credit restraint program. In addition, the drop in the saving rate
undoubtedly was related to the temporary opportunity to save on auto
purchases afforded by the sizable rebates offered mainly in February and
March; auto sales accounted for more
than half of the increase in spending
for durable goods in the first quarter.
Once most of the rebate programs
ended, however, auto sales dropped
sharply and remained at a reduced
pace throughout the second quarter.
In addition to the cutback in auto demand, spending for furniture and appliances also weakened in the second
quarter. At the same time, outlays
for general merchandise increased
only moderately, and continuing conservation efforts led to cutbacks in the
volume of gasoline purchases. On balance, consumption expenditures appeared to have declined slightly in the
second quarter after allowing for inflation. In effect, after the first-quarter
surge in durable goods purchases, consumers retrenched to reestablish a
more normal spending pattern; even
so, the saving rate remained very low
by historical standards.
Business investment. Real business
fixed investment increased at a 13 percent annual rate in the first quarter,
as temporary developments combined
to boost spending. In the equipment
area, businesses took advantage of the
rebates offered on cars and added
heavily to their fleets. Nonresidential
construction also increased vigorously
early in the year, aided by the relatively mild weather throughout much
of the country.
Following this surge, capital spending appears to have declined this
spring. Shipments of nondefense capi


tal goods have been little changed on
balance, and business purchases of
autos dropped sharply following the
end of the rebate programs. Nonresidential construction spending also fell
in the second quarter, reflecting in
part the sustained tautness in financial markets so far this year. In addition, the quickening of activity that
typically occurs in the spring was not
so strong as usual, after the relatively
mild winter.
Business inventories declined in
real terms during the first quarter,
continuing the liquidation that had
been under way over the second half
of last year. Early this year, manufacturers were rebuilding their stocks
at a substantial rate, but this accumulation was more than offset by the
liquidation of auto stocks that resulted
from the various rebate programs.
With the end of the price concessions,
however, auto sales weakened appreciably and dealer stocks rose quickly
during the second quarter. At the end
of June, the inventory of U.S.-made
autos had risen to 87 days supply,
only slightly below the peak reported
in May 1980. Thus, with sharp increases in auto inventories and with
manufacturers' real inventories showing relatively little change in April
and May, overall business inventories
probably rose in real terms during the
second quarter. Apart from autos,
however, business inventories still appeared to be well in line with sales in
the second quarter.
Residential construction. Residential construction activity weakened
considerably over the first half of
1981. Housing starts, which had been
averaging about XVi million units at
an annual rate in the latter part of
1980, moved down toward a rate of
1 million units over the course of the
past six months. Although starts de-

Monetary Policy Reports
clined early in the year, the value of
construction put in place did not begin to fall appreciably until the spring,
reflecting in part the favorable winter
weather as well as the normal lag between starts and construction activity.
In the single-family sector, starts
declined 30 percent from December
1980 to June 1981. Sales of new and
existing single-family homes also have
dropped sharply this year. With conventional mortgage rates again rising
to unprecedented levels, sales activity
has been supported to some extent by
sellers offering concessionary financing. At the same time, some deceleration in house prices has been apparent; existing home prices increased at
a 4 percent annual rate during the first
five months of 1981 compared with
14 percent last year.
After showing a spurt late last year,
multifamily starts also have dropped
sharply this year. Activity in this sector has increasingly been devoted to
the construction of condominiums
and cooperatives rather than rental
units. First-quarter data indicate that
construction of such "for sale" units
was up almost a third from a year
earlier and accounted for 45 percent
of multifamily starts. The popularity
of condominiums and cooperatives
probably reflects their attractiveness
as a lower-cost alternative to new
single-family homes.
Government expenditures. Federal
government purchases of goods and
services rose at an annual rate of
15 percent in real terms in the first
quarter and then declined in the second quarter. This volatility was entirely attributable to acquisitions of
agricultural inventories by the Commodity Credit Corporation in the first
quarter and a runoff of these stocks in
the second quarter. Defense spending
in real terms was virtually unchanged




55

during the first half of the year, but
sustained growth of order backlogs at
manufacturers of defense goods indicates continued economic stimulus
from this source. Increases on the
revenue side of the budget offset this
expansionary influence. Large social
security tax increases became effective
at the beginning of the year, and the
rapid growth in GNP at the turn of the
year boosted other revenues. On balance, the budget shifted toward restraint. The federal deficit on a national income accounts basis probably
shrank by about $26 billion at an annual rate between the fourth quarter
of 1980 and the second quarter of
1981, while the high-employment budget, which abstracts from the effects
of changes in economic activity, became more restrictive by a similar
amount as the unemployment rate
was little changed over the period.
Real purchases by state and local
governments edged down over the first
six months of the year, following no
growth throughout 1980. In general
the continued sluggishness in this sector reflected the effects of fiscal limitation measures passed in a number
of areas in recent years, as well as reduced growth of federal grants-in-aid.
Employment fell slightly in the first
half, with job losses greatest in the
federally funded public service employment program. Spending for construction was about unchanged. Despite the expenditure cuts, outlays did
not decline so rapidly as receipts, and
the state and local government sector's operating surplus was almost
completely erased by spring after having been consistently positive for several years.
International trade and payments.
Real exports of goods and services
grew rapidly in the first quarter of
1981, in part because of strong growth

56

Monetary Policy Reports

in GNP of two of our major trading
partners, Canada and Mexico. The
growth in real exports moderated
somewhat in the second quarter in response to a slowing of economic expansion abroad and the appreciation
of the dollar. Increases in both agricultural and nonagricultural exports
contributed to the growth of total exports in the first half. The volume of
imports also has expanded rapidly so
far this year. Strong domestic demands during the first quarter and the
appreciation of the dollar helped
boost imports. Oil imports increased
from their year-end levels, although
the volume continued to be below the
average for 1980 as a whole.
The U.S. merchandise trade deficit
declined from about $22 billion at an
annual rate in the fourth quarter of
1980 to roughly $18 billion in the
first quarter of 1981. The current
account, reflecting this improved
trade performance as well as larger
net investment income from abroad,
changed from a $6 billion surplus
(annual rate) in the fourth quarter
of 1980 to a surplus of about $12 billion in the first quarter of this year.
But with export growth slowing recently, the trade deficit apparently
widened in the second quarter and
the current-account surplus was reduced.
Employment and labor markets.
Employment expanded at a much
slower rate during the first half of
1981 than during the second half of
1980; in June, nonfarm payroll employment was about 565,000 higher
than in December, compared with an
increase of 860,000 over the preceding half-year. On balance, the increase in employment was barely sufficient to absorb the influx of workers
into the labor force, and the unemployment rate hovered around 7.4




percent throughout the first half of the
year, just below its 1980 high of 7.6
percent.
Employment has continued to rise
at a moderate pace in the services
and trade sectors, while the number
of manufacturing jobs has expanded
sluggishly this year and remains below the previous peak in 1979. Employment in the automotive industry
has continued at a depressed level,
despite some recalls, with 160,000
auto workers still on indefinite layoff
at the end of June. In recent months
sharp declines occurred among construction workers, reflecting weak
building activity this spring. The
number of government jobs also has
contracted since February, as federal
hiring was curtailed and cutbacks in
federally funded public service jobs
reduced state and local payrolls.
Prices and labor costs. The pace
of inflation slowed considerably in the
first half of this year, receding from
double-digit rates for the first time
in two years. The consumer price
index rose at an annual rate of about
8Vi percent through May compared
with 12i/2 percent over 1980. The
relief has been concentrated in the
food and energy areas; however, a
considerable slowing of price increases
for consumer commodities more generally also has been evident in 1981
compared with the previous year. Inflation in the consumer service sector,
on the other hand, has diminished
little, owing in large part to the substantial weight that rising labor costs
have in this sector.
Retail food prices rose at an annual rate of less than 1 percent in the
first five months of 1981, in marked
contrast to the 10V4 percent pace of
1980. The deceleration in food prices
in early 1981 was largely confined to
sharp declines for meats and related

Monetary Policy Reports
products. More recently, however,
slowdown has been much more widespread. Prices of fresh fruits and
vegetables fell sharply in May, and
the rise in prices of dairy products
slowed noticeably.
In the energy area, price increases
by the Organization of Petroleum Exporting Countries, coupled with full
decontrol of domestic crude petroleum, led to a surge in energy prices
early in 1981; in the first three months
overall retail energy prices rose at just
under a 50 percent annual rate. Later,
however, the rise in energy costs
slowed sharply, reflecting the emergence of relatively abundant supplies
in petroleum markets. Declining demands combined with high levels of
production by Saudi Arabia have resulted in price reductions at both the
producer and the refiner levels in
the second quarter. Even so, energy
prices did not decline overall, as
prices of natural gas—currently undergoing decontrol—and electricity
continued to rise.
Costs of homeownership, as measured in the consumer price index,
also have risen more slowly. So far
this year, this component has increased at an annual rate near 8 percent, less than half the pace of 1980.
The home price measure used in constructing this component has fallen
on balance this year, but higher
financing costs have more than offset
this decline. The CPI measure of
home prices is based on a relatively
small sample of home sales, and thus,
the recent absolute declines in this
measure may overstate the degree of
softening in housing prices. However, other broader-based indexes indicate a distinct moderation in the
rate of increase in home prices this
year.
Prices of consumer items other




57

than food, energy, and homeownership increased at an annual rate of
8V4 percent over the first five months
of 1981, somewhat below the 10 percent pace over the 12 months of
1980. The moderation in price gains
for commodities excluding food has
been particularly striking; these items
decelerated from a pace of 11 Vi percent over the 12 months of 1980 to
8 percent in the first part of 1981.
Prices for consumer services other
than homefinancingand energy, however, have barely edged off from the
1(H4 percent pace of 1980, as increases in these items tend to follow
more closely the underlying trend in
labor costs.
Movements in labor costs reflected
several special factors in the first half
in addition to wage and productivity
changes. Growth in hourly compensation—which includes employer contributions to social insurance and the
costs of fringe benefits—accelerated
from a pace of 10 percent in 1980
to 11V4 percent in the first quarter,
owing to an upward adjustment in the
tax rate for social security contributions and a rise in the base salary to
which the tax rate is applied.
On balance, the pace of wage increases in the first half appears to
have moderated somewhat. The index
of average hourly earnings, which is
a measure of wage trends for production and nonsupervisory personnel,
increased at an annual rate of SV2 percent in the first six months of the year
compared with 9Vi percent last year.
In manufacturing, moreover, wage
increases so far this year have been
running well below the 11 percent
rate posted in 1980, possibly due to
the light calendar for new bargaining settlements. While wage increases
have abated somewhat, the pace of
advance remains strong. Some up-

58

Monetary Policy Reports

ward pressures have been generated
by catchup adjustments in response
to the steep rise in consumer prices
last year. In addition, the scheduled
minimum wage increase in January
boosted wage rates in the trade and
service sectors early in the year.
The sharp rebound in productivity
had a moderating influence on the
rise in unit labor costs in the first
quarter, offsetting some of the sizable
increases in wages and other labor
expenses. Nonetheless, the cyclical
recovery of productivity since mid1980 has been sluggish by historical
standards, and by the first quarter of
1981 output per hour in the nonfarm
business sector was just 1 percent
above the level a year earlier. Moreover, estimates of weak growth in output suggest that productivity gains
provided little, if any, offset to wage
increases in the second quarter.
Financial Developments
during the First Half of 1981
Interest rates. Short-term market
interest rates began the year at, or
only a bit below, record highs after
having been on an uptrend since mid1980 as economic activity rebounded
and the Federal Reserve sought to
restrain monetary expansion. During
the opening months of 1981, however, money growth weakened, and
the demand for reserves fell relative
to the provision of nonborrowed reserves consistent with the FOMC's
monetary targets. Short-term rates
began to ease, and by the end of the
first quarter, the federal funds rate
was 6Vi percentage points below its
January peak, while other short-term
rates were down 2 to 3 percentage
points. Early in the second quarter,
growth in money accelerated, renewing pressures in the reserves market.
This, along with an increase of 1 per-




centage point on May 5 in both the
discount rate and the surcharge rate,
gave an upward impetus to shortterm rates. These rates later declined
somewhat as money growth weakened in May and June, but in early
July they were about at the same
levels or a bit higher than at the beginning of the year.
Long-term interest rates moved
quite differently than short-term rates,
particularly during the first quarter.
Like many short-term rates, bond
rates began the year somewhat below
the record highs that had just been
established in December. However,
in contrast to the declines in yields
on short-term instruments, long-term
rates generally rose over the first
quarter. Many financial market participants apparently were concerned
about underlying inflationary pressures and about the prospects for
continuing large budget deficits in an
environment of strong private credit
demands. Such concerns, including
the growing backlog of potential longterm financing, continued prominent
in market sentiment during much of
the second quarter, and the rise in
short-term rates early in the quarter
also helped move most long-term
rates well above their previous highs.
Since peaking in May, however, longterm rates have retraced some of their
earlier gains for the year. This improvement seems to reflect in part
more optimism about the prospects
for reduced inflation as encouraging
price data were reported, as indications appeared that economic growth
had slowed, as firmness in monetary
policy was apparent, and as confidence grew that government policy
would appropriately restrain federal
spending.
Foreign exchange markets and the
dollar. The dollar appreciated strongly

Monetary Policy Reports
during the first half of 1981, rising
about 15 percent on a weightedaverage basis. Increases against European currencies averaged about 20
percent, while the appreciation against
the yen was 10 percent. Over some
time intervals, short-run movements
in exchange rates paralleled the
course of differentials between U.S.
and foreign short-term interest rates.
But over the first half as a whole, the
dollar appreciated considerably even
though U.S. interest rates fell on balance relative to rates in key financial
markets abroad, which have risen
markedly. A substantial part of the
dollar's buoyancy can be associated
with the improved outlook for U.S.
inflation and the growing consensus
that monetary restraint will be applied
over an extended horizon. In addition, the continental European currencies have been weakened by the
tensions over Poland and by general
political uncertainties in several European countries.
Domestic credit flows. After rebounding rapidly in the second half
of 1980, total funds raised in credit
and equity markets by domestic nonfinancial sectors of the U.S. economy
leveled off in the first half of 1981,
based on preliminary estimates. Firm
credit market conditions contributed
to some slowing in credit flows to private sectors, especially mortgage flows
to households. Borrowing by nonfinancial businesses tapered off in the
first four months of the year, but
began to pick up in late spring. On
a quarterly basis, the pattern of credit
flows was greatly affected by the U.S.
Treasury, which tapped financial markets for an exceptionally large volume
of funds early in the year and then
did very little net borrowing in the
spring.
The credit requirements of the U.S.




59

Treasury were substantial in the first
quarter, owing to a combined (onand off-budget) federal deficit that
exceeded $38 billion. In addition, redemptions of savings bonds totaled
more than $2 billion, further boosting
Treasury financing needs. The Treasury met these needs primarily by issuing marketable securities and, to a
lesser extent, by a further reduction
in cash balances. In the second quarter, when normal seasonal tax receipts moved the combined federal
budget to a surplus position, the
Treasury used inflows to rebuild its
cash balances and to pay down an
additional $2 billion of nonmarketable securities.
Borrowing by state and local governments remained heavy in the first
quarter of 1981 despite a sharp decline in the issuance of mortgage revenue bonds. The volume of housingrelated bonds dropped dramatically
after January 1, 1981, when statutory restrictions on such offerings
took effect. These restrictions, among
other things, place limitations on eligible uses of the funds with respect to
the value and location of homes and
the types of home buyers and the
spread between mortgage rates and
the original cost of borrowing; also,
the volume of mortgage bonds that
can be issued by governmental units
is limited. The volume of nonhousing
issues early in 1981 was buoyed in
part by offerings that had been postponed in the fourth quarter, when a
large number of mortgage revenue
bonds were brought to market in anticipation of regulatory restrictions
and yields on municipal bonds rose
to then-record levels. State and local
governments reduced their issuance
of long-term debt in the second quarter as interest costs rose again to
record highs. However, financing re-

60

Monetary Policy Reports

quirements of many municipal units their offerings. In addition to shorter
remained substantial, in part owing maturities, an increased volume of
to declines in revenues resulting from convertible debentures and bonds
cutbacks in grants-in-aid to state and with below-market—or zero—coulocal governments.
pons were sold at deep discount.
In the private sector, nonfinancial
A moderate slowing in bond isbusiness firms borrowed at a reduced suance occurred in May when yields
pace early in the year. The fall-off in on long-term debt reached new highs,
borrowing was concentrated in short- and in June, expectations of nearterm credit markets, and, in particu- term rate declines may have led some
lar, reflected a sharp deceleration in firms to delay or postpone offerings.
growth of business loans from domes- But continued indications were that
tic offices of U.S. banks. The lag of bond issuance would increase quickly
the banks' prime lending rates behind in the event of improved market condownward movements in open market ditions because many firms would
rates reduced the relative attractive- like to reduce their short-term inness to businesses of bank loans early debtedness. Flow of funds estimates
in the year. During the first quar- indicate that the aggregate ratio of
ter, some firms' short-term needs short-term debt to total debt of nonwere met by borrowing from foreign financial corporations has risen well
branches of U.S. banks at rates tied above the previous record level
to Eurodollar rates; issuance of com- reached in 1974.
mercial paper also increased, though
Net borrowing by the household
not enough to offset the decline in sector declined slightly on balance in
bank borrowing. Near midyear, more the first half of the year, as a modest
favorable rate spreads for bank loans recovery in consumer credit growth
and a bigger gap between cash flow only partially offset a reduction in net
and investment expenditures—largely mortgage formation. Growth of conthe result of increased inventory ac- sumer installment credit was bolcumulation—encouraged renewed ex- stered in the first quarter by increases
pansion of business loans at commer- in automobile loans, particularly at
cial banks. Growth of nonfinancial finance company subsidiaries of the
commercial paper also continued ro- automobile manufacturers. While auto
bust in the second quarter.
loans slowed in the second quarter
While short-term borrowing fluc- in response to slackening car sales,
tuated, long-term bond issuance by the nonauto consumer goods and perbusiness firms was maintained at a sonal loan categories of installment
fairly heavy pace over most of the credit showed some pick-up. Despite
first half. Some companies with the increases in consumer installment
major long-range investment pro- debt, the debt position of the housegrams apparently have elected to hold sector continued to improve in
come to the bond markets at regular the first half of the year. The ratio
intervals to reduce their risk of hav- of consumer installment debt repaying to finance large amounts at par- ments to disposable personal income
ticularly unfavorable rates. Firms fell further from 1979 peaks in the
tapping the bond markets, mean- first four months of 1981, reflecting
while, sought to hold down borrowing strong growth in income.
costs by adjusting various terms of
Home mortgage borrowing dropped




Monetary Policy Reports
sharply in the first half. The weakness in mortgage activity was accounted for mostly by reduced lending by thrift institutions. Weak deposit
flows and continued erosion of earnings constrained the supply of mortgage funds at thrift institutions, and
rates on new commitments for conventional home mortgages at savings
and loan institutions rose to a record
level of near 17 percent in late May
and remained near this level in June
and July. Net mortgage lending at
commercial banks also fell, and fewer
funds for housing were available from
municipal units owing to the pre-




61

viously mentioned restrictions on issuance of mortgage revenue bonds.
The taut mortgage credit conditions
have led to increased use of so-called
"creative financing" techniques, including wraparound loans, builder
buydown arrangements, and the assumption of low-rate first trusts when
house sellers are willing to take back
a second mortgage. One effect of
such financing arrangements has been
to slow the prepayment of old, lowyielding mortgages at the thrift institutions, thus reducing the earnings
potential from reinvestment of funds
by these institutions.

Part 2
Records, Operations,
and Organization




65

Record of Policy Actions
of the Board of Governors
Regulation C
(Home Mortgage Disclosure)
July 29, 1981—Revision
The Board revised Regulation C to
implement amendments to the Home
Mortgage Disclosure Act and to simplify the language and substance of
the regulation.
Votes for this action: Messrs.
Volcker, Wallich, Partee, Mrs. Teeters, Messrs. Rice, and Gramley.
Votes against this action: None.
Absent and not voting: Mr. Schultz.
The Home Mortgage Disclosure
Act of 1975 required most lenders
in standard metropolitan statistical
areas (SMSAs) to disclose annually
the amount of their residential mortgage lending and the areas in which
such loans were made. Recent amendments to the act required that the
mortgage data be disclosed by census
tract and county, rather than by census tract and ZIP code, and the Board
revised the regulation to include that
requirement. The statutory amendments also required the establishment
of central data repositories in each
SMSA for the collection of the required mortgage data, and the aggregation of those data by the Board into
totals covering all institutions in each
SMSA. To facilitate collection and
aggregation of the data, the Board is
developing a standard reporting form
for use by covered institutions.
In addition to revisions prompted
by statutory amendments, the Board
simplified Regulation C to make it



clearer and more concise and to focus
the disclosure requirements on those
that would be most useful and that
could be provided at a reasonable
cost. To satisfy the requirement that
institutions provide notice in their
lobby of the availability of the mortgage data, the Board will furnish a
poster upon request, thereby eliminating the need for lenders to design
their own notices.
The revised regulation was effective July 31, 1981; the lobby notice
requirement was effective September 30, 1981.
Regulation D
(Reserve Requirements of
Depository Institutions)
April 8, 1981—Amendment
The Board amended Regulation D,
effective April 30, 1981, to exempt
from reserve requirements certain
kinds of time deposits representing
funds of deferred compensation plans.
Votes for this action: Messrs.
Volcker, Schultz, Wallich, Partee,
Rice, and Gramley. Votes against
this action: None. Absent and not
voting: Mrs. Teeters.

The Board determined that nontransferable time deposits held by an
employer as part of an unfunded deferred compensation plan established
for employees pursuant to the Revenue Act of 1978 were personal time
deposits. This determination allows
such funds to be exempt from reserve
requirements and assures more equi-

66

Board Policy Actions

table application of reserve requirements to time deposits held for retirement income.

November 18, 1981—
Amendments
The Board amended Regulation D,
effective December 18, 1981, to provide a five-year exemption from reserve requirements for certain nonmember depository institutions in
Hawaii. The Board also approved a
temporary amendment, effective November 19, 1981, that makes institutions that began operations after
November 17, 1981, ineligible to
phase in reserve requirements over a
two-year period when their reservable
liabilities exceed $50 million.
Votes for these actions: Messrs.
Schultz, Partee, Mrs. Teeters, Messrs.
Rice, and Gramley. Votes against
these actions: None. Absent and not
voting: Messrs. Volcker and Wallich.
Nonmember depository institutions
chartered under the laws of Hawaii
and operating in that state are exempt
for five years from maintenance of
required reserves, pursuant to the
Monetary Control Act of 1980. Depository institutions chartered federally or by other states and having
offices in Hawaii were not covered by
the exemption. A provision of the
Omnibus Budget Reconciliation Act
of 1981, however, extended to all
depository institutions with offices in
Hawaii the same five-year deferment
of reserve requirements on deposits
maintained at such offices. Accordingly, the Board amended Regulation D to incorporate that change.
The second amendment affected a
provision in Regulation D that allows



newly established institutions to phase
in required reserves over two years.
Recent changes in banking laws in
certain states, including Delaware and
South Dakota, permit out-of-state
banking organizations to establish
banks in those states under certain
conditions. A number of large institutions headquartered outside of Delaware and South Dakota either had
indicated intentions to establish subsidiaries or already had opened offices
in those states, and the parent organizations were expected to transfer
significant amounts of deposits to
these out-of-state subsidiaries. Because such subsidiaries would not
have the start-up problems faced by
other new banks, the Board believed
they should not be eligible to phase in
reserve requirements over two years.
The Board, therefore, amended Regulation D so that new institutions would
no longer be eligible for the phase-in
after their liabilities reached a certain
level. The Board decided that institutions with less than $50 million in
reservable liabilities are eligible for
the two-year phase-in of reserve requirements; when reservable liabilities
equal or exceed that amount, institutions are required to maintain full
reserves.
In considering this amendment, the
Board recognized that extending coverage of the amendment to all institutions could be disruptive to existing
subsidiaries, yet grandfathering such
operations could give those institutions an unfair competitive advantage.
The Board, therefore, adopted a
temporary amendment, applicable
only to those institutions that began
operations after November 17, 1981.
In addition, it sought comment on a
permanent amendment that would extend coverage of this provision to all

Board Policy Actions
institutions, including those that began operations before November 18,
1981.
December 16, 1 9 8 1 —
Amendment and Interpretation
The Board approved an amendment
to Regulation D, effective December 31, 1981, that increased the
amount of transaction balances to
which the lower reserve requirement
applies. The Board also adopted an
interpretation that explained the circumstances under which international
banking facilities may purchase or
sell assets in the secondary market.
Votes for these actions: Messrs.
Volcker, Schultz, Wallich, Partee,
Mrs. Teeters, Messrs. Rice, and
Gramley. Votes against these actions: None.
Under the Monetary Control Act
of 1980, most depository institutions,
Edge and Agreement corporations,
and U.S. agencies and branches of
foreign banks are subject to reserve
requirements set by the Board. The
reserve requirements initially imposed
under the act were 3 percent on the
first $25 million of an institution's
transaction balances and 12 percent
on balances above that level. The act
further required that the Board adjust
the minimum level annually to reflect
changes in the level of transaction
balances in the banking system nationwide. Recent growth in such balances indicated that an increase was
warranted. Accordingly, the Board
amended Regulation D to increase to
$26 million the amount of transaction
balances subject to the lower reserve
requirement. In taking this action,
the Board agreed that the formula
for determining the adjustment should
be applied to transaction balances



67

from which cash items in the process
of collection and balances due from
other institutions were deducted. The
amendment, effective December 31,
1981, was applicable to reserves required to be maintained for the period
beginning January 14, 1982.
The interpretation adopted by the
Board addressed the extent to which
international banking facilities (IBFs)
may purchase assets from or sell them
to third parties. The Board determined that IBFs generally may purchase or sell eligible assets (such as
loans, loan participations, securities,
and certificates of deposit) in the secondary market, as long as the transactions are at arm's length and without recourse.
Regulation D (Reserve
Requirements of Depository
Institutions) and Regulation Q
(Interest on Deposits)
May 1 3 , 1 9 8 1 —Amendments
The Board amended Regulations D
and Q, effective May 14, 1981, to
subject deposits of less than $100,000
held at the foreign offices of domestic
depository institutions to reserve requirements and interest rate ceilings.
Votes for these actions: Messrs.
Volcker, Schultz, Partee, Mrs. Teeters, and Mr. Rice. Votes against
these actions: None. Absent and not
voting: Messrs. Wallich and Gramley.
The Board had become aware of
certain deposit arrangements that allowed customers to deposit funds with
a domestic bank, which would then
transfer the funds to its foreign office;
the deposits were payable in the
United States and served no foreign
business purpose. By adopting these

68

Board Policy Actions

amendments, the Board sought to
prevent the proliferation of such
arrangements, which it believed would
erode the effectiveness of the structure
of interest rate ceilings, disrupt the
flow of funds among institutions, and
hamper the conduct of monetary
policy.
June 9,1981—Amendments and
Policy Statement
The Board amended Regulations D
and Q, effective December 3, 1981,
to authorize the establishment of international banking facilities in the
United States. It also issued a policy
statement regarding the activities of
such facilities.
Votes for these actions: Messrs.
Volcker, Schultz, Wallich, Partee,
Mrs. Teeters, Messrs. Rice, and
Gramley. Votes against these actions: None.
The amendments exempt from reserve requirements and deposit interest rate ceilings certain nonpersonal
time deposits held at the international
banking facilities (IBFs) of U.S. depository institutions, Edge and Agreement corporations, and U.S. agencies
and branches of foreign banks. IBFs
may accept deposits and extend credit
to foreign residents or other IBFs free
from reserve requirements and interest rate limitations. Funds raised by
an IBF, however, may be used only
to extend credit to foreign residents,
to the IBF's parent, or to other IBFs.
With these facilities, domestic institutions will be able to compete for international banking business that previously was conducted primarily by
foreign banks and offshore branches.
To ensure that IBFs are used solely
for international business and not for
evading domestic banking regulations,



the Board imposed a number of conditions under which banks may establish IBFs, including the following:
(1) only foreign residents, foreign
offices of U.S. companies, or other
IBFs may have time deposit accounts
at an IBF; (2) deposits received from
nonbanks must have a maturity, or a
required notice period before withdrawal, of at least two business days;
(3) the minimum transaction amount
for deposits or withdrawals from an
IBF time deposit held by a nonbank
is $100,000; (4) deposits received
from foreign offices of U.S. depository institutions or foreign banks,
from other IBFs, or from an IBF's
parent must have a minimum one-day
(overnight) maturity; and (5) an IBF
may make loans only to foreign residents, to its parent, or to another IBF.
In the policy statement regarding
use of IBFs, the Board emphasized
that deposit accounts and IBF loans
may be used only to support operations outside the United States and
not to circumvent domestic regulations. IBFs must notify their nonbank customers of this policy at the
time a credit or deposit account is
established; new customers who are
nonbank foreign affiliates of U.S. residents must acknowledge receipt of the
notice. The Board provided a model
notice and a model statement for acknowledging receipt.
The Board delayed the effective
date of the amendment until December 3 to allow institutions to adjust
to the revised settlement procedures
that would be introduced in early
October by the Clearing House Interbank Payments System (CHIPS, the
payment system for international
transactions), and to allow states
other than New York time to authorize IBFs if they so chose.

Board Policy Actions
Regulation £
(Electronic Fund Transfers)
January 7, 1981—Amendment
The Board amended Regulation E,
effective January 15, 1981, to permit
creditors to debit their customers'
accounts automatically for repayment
of preauthorized overdraft credits.

69

ing the regulation of certain tender
offers and other matters.
Votes for these actions: Messrs.
Schultz, Wallich, Partee, Mrs. Teeters, Messrs. Rice, and Gramley.
Votes against these actions: None.
Absent and not voting: Mr. Volcker.

The amendments conforming to
SEC changes provided (1) protecVotes for this action: Messrs. Schultz, tion from liability for error in finanWallich, Partee, Mrs. Teeters, Messrs. cial statements that project future
Rice, and Gramley. Votes against
this action: None. Absent and not earnings, revenues, expenses, or similar items; (2) rules and scheduling
voting: Mr. Volcker.
requirements for shareholder particiA section of Regulation E prohibits pation in corporate governance; (3)
creditors from imposing as a condi- an exemption from the reporting and
tion for granting credit a requirement liability provisions of certain acquisithat the loan be repaid by using auto- tions under dividend reinvestment
matic payments from the borrower's plans; and (4) disclosure requireaccount (the compulsory-use prohibi- ments for tender offers. The other
tion) . Traditionally, overdraft check- amendments were technical in nature.
ing plans have included a provision
The SEC also had adopted two
for an automatic debiting of a mini- other changes for which the Board
mum payment from the customer's chose not to adopt conforming amendaccount to repay indebtedness under ments. Those changes related to (1)
the plan. The Board decided to tender offers by certain publicly held
exempt such payment features from corporations for their own securities,
the compulsory-use prohibition be- and (2) conversions from a publicly
cause historically they have been in- held company to a private concern.
cluded in overdraft plans. Permitting The Board issued a policy statement
automatic collection of payments will that explained why it chose not to
facilitate the continued provision of adopt conforming amendments and
overdraft check protection.
that described the procedures it would
follow if a member bank proposed to
Regulation F (Securities of
reduce its equity securities or change
Member State Banks)
its structure in transactions similar to
those covered by the SEC rules.
January 28, 1981—Amendments
and Policy Statement
The Board adopted amendments to Regulation J (Collection of
Regulation F similar to amendments Checks and Other Items and
in comparable regulations adopted by Wire Transfers of Funds)
the Securities and Exchange Commis- August 12, 1981—Amendment
sion, as well as technical amendments
and changes in reporting forms, effec- The Board amended Regulation J,
tive March 9, 1981. The Board also effective immediately, to extend covapproved a policy statement regard- erage of the provisions governing the




70

Board Policy Actions

System's check collection services to
nonmember depository institutions.
Votes for this action: Messrs. Schultz,
Wallich, Mrs. Teeters, Messrs. Rice,
and Gramley. Votes against this
action: None. Absent and not voting: Messrs. Volcker and Partee.
The Monetary Control Act of 1980
gave all depository institutions access
to the System's check collection services. The Board, therefore, approved
an amendment to Regulation J that
expands the definitions of "bank" and
"sender" to include those nonmember
institutions.
Regulation K (International
Banking Operations)
January 14, 1981—Interpretation
The Board adopted an interpretation
of Regulation K, effective January 19,
1981, describing the circumstances
under which U.S. banking organizations could invest in foreign companies that do business in the United
States.
Votes for this action: Messrs. Schultz,
Wallich, Partee, Mrs. Teeters, Messrs.
Rice, and Gramley. Votes against
this action: None. Absent and not
voting: Mr. Volcker.
The interpretation allows member
banks, bank holding companies, and
Edge corporations, upon approval
by the Board, to invest in foreign
companies that do business, in the
United States, that is entirely domestic.
The Board normally will approve
applications for such investments subject to the following conditions:
(1) the foreign company's business
is predominantly abroad; (2) the
foreign company's activities in the
United States are banking or closely



related to banking; and (3) the U.S.
banking organization owns less than
25 percent of the foreign company or
does not otherwise control it.
March 11, 1981—Amendment
The Board amended Regulation K,
effective March 16, 1981, to exclude
ineligible bankers acceptances from
the limitations on the amount of
acceptances that foreign branches of
U.S. banks may issue.
Votes for this action: Messrs. Wallich,
Partee, Mrs. Teeters, and Mr. Gramley. Votes against this action: Messrs.
Volcker and Schultz. Absent and not
voting: Mr. Rice.
An eligible acceptance is one that
(1) represents a trade transaction
involving importing, exporting, storing, or domestic shipping of goods,
and (2) matures in 90 days or less
(180 days in the case of agricultural
products). Generally, all other acceptances are regarded as ineligible. Eligible acceptances are exempt from
reserve requirements; ineligible acceptances are not, if payable in the
United States.
Regulation K allows foreign
branches of member banks to issue
both types of acceptances, but limits
the amount of acceptances that may
be issued to 50 percent of a member
bank's paid-up capital and surplus
(100 percent with Board approval).
The amendment removes ineligible
acceptances from the limitations on
the amount that foreign branches
may issue. Removal of the restriction will promote equitable treatment
of bankers acceptances issued by a
foreign branch with those issued
domestically. It also will help member banks that are near their limit to
compete more effectively with foreign

Board Policy Actions
and nonmember banking organizations, which are not covered by the
limitation.
Messrs. Volcker and Schultz dissented from this action. They were
not convinced that the amendment
would promote competitive equality
and they were concerned about the
effects of the change on international
banking.

July 29, 1981—Amendment
The Board amended Regulation K,
effective immediately, to include certain subordinated notes and debentures in the definition of capital and
surplus when determining the capital
adequacy of Edge corporations.
Votes for this action: Messrs.
Volcker, Wallich, Partee, Mrs. Teeters, Messrs. Rice, and Gramley.
Votes against this action: None. Absent and not voting: Mr. Schultz.
Regulation K allowed Edge corporations to count only their unimpaired capital and surplus for purposes
of meeting the capital requirements of
the regulation. Member banks, however, were permitted to count certain
long-term subordinated debt for capital adequacy purposes, if the debt
instruments were not considered deposits as defined by Regulation D
(Reserve Requirements of Depository Institutions).
To provide additional flexibility in
meeting capital requirements, the
Board decided to permit an Edge corporation to count subordinated notes
or debentures in amounts not exceeding 50 percent of its nondebt capital.
Moreover, the stipulation for member
banks that subordinated debt cannot
qualify as capital without the Board's
approval is applicable also to Edge
corporations.



71

Regulation M
(Consumer Leasing)
and
Regulation Z
(Truth In Lending)

March 18, 1 9 8 1 —
Adoption of Regulations
The Board adopted a revised and
simplified Regulation Z and issued a
new Regulation M comprising the
consumer leasing provisions that previously were in Regulation Z. Both
actions were effective April 1, 1981.
Votes for these actions: Messrs.
Volcker, Schultz, Wallich, Partee,
and Mrs. Teeters. Votes against
these actions: None. Absent and not
voting: Messrs. Rice and Gramley.
Regulation Z was revised pursuant
to the Truth in Lending Simplification
and Reform Act of 1980 to emphasize disclosure of essential credit information in a simple and direct manner. The restructured regulation,
when combined with the model disclosure forms provided in the new
regulation, is less complicated and
technical and hence will aid compliance by creditors. It also will be
easier for consumers to understand.
The leasing provisions in the new
Regulation M were not revised extensively. The Board suspended its
simplification efforts pending congressional action on the Board's recommendation that the Consumer Leasing
Act be simplified.
Although both regulations are effective April 1, 1981, creditors have until
March 31, 1982, to revise their disclosure forms and practices to comply
with the new regulations.

72

Board Policy Actions

Regulation Q (Interest on Deposits)
May 13, 1981—Amendments
June 9, 1981—Amendments and
Policy Statement
These actions are discussed under
Regulation D.
August 12, 1981—Interpretation

the use of medical and educational
facilities.
The interpretation permanently
grandfathers NOW accounts opened
before September 1, 1981, by those
who are no longer eligible because of
this interpretation.
On August 31, the Board suspended
the September 1 effective date of the
interpretation pending the outcome of
a suit challenging the interpretation. A
district court upheld the Board's position, and the Board reinstated the
interpretation, effective September 16,
1981.

The Board adopted an interpretation
of Regulation Q to clarify the types of
depositors who are eligible to hold
negotiable order of withdrawal accounts. The effective date of the interpretation, September 1, was later
changed to September 16, 1981, be- December 16, 1981—Amendments
The Board approved technical amendcause of legal questions.
ments to Regulation Q, effective imVotes for this action: Messrs. Schultz, mediately, to incorporate changes in
Wallich, Mrs. Teeters, Messrs. Rice,
and Gramley. Votes against this ac- the rules governing payment of intertion: None. Absent and not voting: est on deposits that were approved by
Messrs. Volcker and Partee.
the Depository Institutions Deregulation Committee.
Effective December 31, 1980, nonVotes for these actions: Messrs.
bank depository institutions were perVolcker, Schultz, Wallich, Partee,
mitted to offer to certain depositors
Mrs. Teeters, Messrs. Rice, and
negotiable order of withdrawal (NOW)
Gramley. Votes against these acaccounts, on which interest or divitions: None.
dends are paid and through which
The Depository Institutions Decustomers can make third-party payments using negotiable or transfer- regulation Act of 1980 transferred to
able instruments. Those eligible to the Depository Institutions Deregulahold such accounts were generally the tion Committee (DIDC) the authority
same as those eligible to hold savings to prescribe rules governing the payaccounts. To promote consistency, ment of interest on deposits that
to reduce confusion, and to eliminate previously had been held by the Board
the need to make determinations of and the other federal regulators of
eligibility in individual cases, the financial institutions. During 1981,
Board issued an interpretation speci- the DIDC issued final rules affecting
fying that the following classes of de- 26-week money market certificates,
positors are eligible to hold NOW time deposits of less than $100,000
accounts: (1) individuals, including with maturities of 2Vi years to 4
sole proprietorships; (2) specific types years, qualified tax-exempt savings
of nonprofit organizations described in certificates, and time deposits for
the Internal Revenue Code; and (3) individual retirement accounts and
governmental units holding funds for Keogh plans. The Board amended



Board Policy Actions
Regulation Q to conform with those
new rules.
Regulation T
(Credit by Brokers and Dealers)
June 9, 1981—Amendment
The Board amended Regulation T,
effective July 13, 1981, to delete a
provision that permitted the use of
foreign currency in a margin account.
Votes for this action: Messrs.
Volcker, Schultz, Wallich, Partee,
Mrs. Teeters, Messrs. Rice, and
Gramley. Votes against this action:
None.
On December 12, 1980, the Board
determined that bank depository receipts for gold could not act as a
substitute for cash in a margin account. At the same time, the Board
published for comment a proposed
amendment on the related question of
whether foreign currency could be
used to meet margin requirements.
Both actions were prompted by questions that indicated some confusion
about the meaning of a provision of
Regulation T (section 220.6(j)).
After reviewing the comments, the
Board deleted section 220.6(j) to
clarify that Regulation T does not
permit the speculative holding of
foreign currency and securities in the
same account. The amendment does
not preclude the acceptance of foreign
currency in a margin account if it is
immediately converted into U.S. currency.

October 2, 1981—Amendment
The Board amended Regulation T,
effective October 26, 1981, to establish margin requirements for options
on "exempted debt" securities.



73

Votes for this action: Messrs.
Volcker, Schultz, Partee, Mrs. Teeters, Messrs. Rice, and Gramley.
Votes against this action: None.
Absent and not voting: Mr. Wallich.
The amendment to Regulation T
provides separate margin requirements
for options on debt securities issued
or guaranteed by government entities.
Such securities are exempt by statute
from the Board's margin regulations.
For uncovered options written on
exempted securities that are traded on
a national exchange, the initial margin requirement is determined by the
rules of the exchange on which the
option is traded, provided such rules
have been approved by the Securities
and Exchange Commission. Options
on exempted debt securities traded
over the counter have margins similar to those for comparable options
that are traded on an exchange.
Covered options, that is, those for
which the investor also owns the
exempted securities against which the
options are written, have no initial
margin requirements.
The amendment does not affect the
prohibition against using options as
collateral for securities credit.
Regulation 1
(Bank Holding Companies and
Change in Bank Control)
July 15, 1981—Amendments
The Board amended Regulation Y
and a related interpretation, effective
September 1, 1981, to reflect decisions by a court of appeals that
limited the insurance agency activities
of bank holding companies and their
nonbank subsidiaries.
Votes for these actions: Messrs.
Volcker, Partee, and Gramley. Votes

74

Board Policy Actions

against these actions: None: Abstention: Mr. Wallich. Absent and not
voting: Mr. Schultz, Mrs. Teeters,
and Mr. Rice.

if the Board determines that the activity is closely related to banking and
a proper incident thereto. In mid1981, after considering requests by
several holding companies to sell
traveler's checks, the Board published
for comment a proposal to permit
holding companies to engage in that
activity. (Previously, the Board had
permitted the activity for specific
organizations on a case-by-case basis.)
After a review of the comments received, the Board determined that the
issuance of traveler's checks was an
activity closely related to banking and
a proper incident thereto and should
be authorized generally for bank
holding companies. The Board noted
that such action should stimulate competition in the traveler's check industry.

The U.S. Court of Appeals for the
Fifth Circuit had determined that the
provision in Regulation Y that permitted bank holding companies to sell
insurance to the public as a matter of
convenience exceeded the intent of
the Bank Holding Company Act. The
Board, therefore, deleted that provision.
The court also invalidated a provision governing nonbank activities
that permitted holding companies to
sell certain types of insurance to
themselves and their nonbank subsidiaries. Although the Board deleted
this provision from the section on
nonbanking activities, it determined
that the activity was permissible under
other provisions of the act. The Board Regulation Z (Truth in Lending)
also revised a related interpretation
to make it consistent with the March 18, 1981—
Adoption of Regulation
amended regulation.
These actions did not affect the This action is discussed under Reguauthority of a holding company to lation M.
act as agent for the sale of insurance
directly related to extensions of Policy Statements and
credit by its bank subsidiaries.
Other Actions
November 18, 1981—Amendment
The Board amended Regulation Y,
effective December 21, 1981, to make
the issuance of traveler's checks a
permissible nonbanking activity for
bank holding companies.
Votes for this action: Messrs. Schultz,
Partee, Mrs. Teeters, Messrs. Rice,
and Gramley. Votes against this action: None. Absent and not voting:
Messrs. Volcker and Wallich.
The Bank Holding Company Act
provides that banking organizations
may engage in a nonbanking activity




April 23, 1981—Disposition of
Insurance Income
The Board adopted a policy statement, effective May 1, 1981, regarding the disposition of income derived
from the sale of credit-related life
insurance.
Votes for this action: Messrs.
Volcker, Schultz, Partee, and Mrs.
Teeters. Votes against this action:
None. Absent and not voting:
Messrs. Wallich, Rice, and Gramley.
The Board adopted a policy statement that restricts employees, officers,

Board Policy Actions
directors, and principal shareholders
of state member banks from profiting
personally from the sale of life insurance sold in connection with loans
made by the bank. Income from such
insurance should be credited to the
bank; or it may be credited to the
holding company or other affiliate of
the bank, so long as the bank receives
reasonable compensation for its role
in selling the insurance. Officers and
employees of the bank may participate in that income under an incentive
or bonus plan, provided such participation does not exceed 5 percent of
the recipient's annual salary.
The statement, which was adopted
jointly by the agencies represented on
the Federal Financial Institutions
Examination Council, indicated that
institutions are allowed up to two
years to amend their procedures to
comply with the new policy.
May 26, 1981—Sale of
Third-Party Commercial Paper
The Board issued a policy statement,
effective immediately, to provide
guidelines for the sale by state member banks of third-party commercial
paper.
Votes for this action: Messrs.
Volcker, Wallich, Partee, Mrs. Teeters, Messrs. Rice, and Gramley.
Votes against this action: None.
Absent and not voting: Mr. Schultz.
In order to promote safe banking
practices by state member banks, the
Board provided guidelines for the sale
of commercial paper issued by a company unrelated to the bank. The
guidelines specify the type and minimum denomination of such instruments that may be sold, the records
that should be maintained for such
sales, and the type of purchasers to
whom such paper may be sold. The




75

guidelines are designed to minimize
the danger that a bank selling commercial paper of an issuer would make
an unsound loan to that issuer. The
guidelines also will prevent other potential conflicts of interest and unsound banking practices.
The Board indicated that it would
monitor sales by state member banks
of such third-party commercial paper
and would supplement or modify the
guidelines as appropriate. Although
the policy was effective immediately,
the Board accepted comment on the
statement from affected institutions
and organizations for two months
after adoption.

October 7, 1981—Enforcement of
Consumer Credit Acts
The Board, on the recommendation
of the Federal Financial Institutions
Examination Council, adopted a
policy statement and a supervisory
guide regarding enforcement of the
Equal Credit Opportunity Act and
the Fair Housing Act.
Votes for this action: Messrs. Schultz,
Partee, Mrs. Teeters, Messrs. Rice,
and Gramley. Vote against this action: Mr. Wallich. Absent and not
voting: Mr. Volcker.
The policy statement reminded state
member banks of their responsibilities
under the Equal Credit Opportunity
and the Fair Housing Acts and informed them of the Board's intention
to enforce those acts vigorously. The
statement indicated that member
banks are required to institute procedures to prevent recurrence of any
violations of those acts. It also informed banks that the Board will
regard failure to comply with certain
specified provisions of the acts as
particularly serious and normally will
require retroactive corrections.

76

Board Policy Actions

The Board also adopted a statement of supervisory enforcement
policy for use by the Federal Reserve
that provides guidance on the types
of actions to be taken to correct violations. The statement identified six
types of conduct, involving inadequate
disclosures or discriminatory lending
practices, that are considered to be
serious violations. Institutions will be
required to take corrective action
retroactively for serious violations
discovered within 24 months, except
for violations of the notice requirements for which the retroactive correction is limited to 6 months.
Governor Wallich opposed this action because he believed it was contrary to the federal government's
goals of deregulation and reduction in
paperwork. He noted that retroactive
correction was not required by either
act, and he believed that the cost to
an institution of correcting past violations would probably exceed the
benefits that aggrieved consumers
would receive. The other Board
members, however, believed the policy
statements were necessary to protect
the rights of credit applicants and to
ensure that creditors correct more
serious violations so that their credit
practices are in compliance with the
consumer credit acts.

The Board and the Office of the
Comptroller of the Currency jointly
adopted guidelines on capital adequacy for use in examining and supervising well-managed national banks,
state member banks, and bank holding companies. (Organizations that
are less than two years old or that are
in unsatisfactory condition will be
subject to individual monitoring and
supervision.) The guidelines are intended to correct the long-term decline
in capital ratios, to reduce disparities
in capital levels among banking organizations of different size, to promote greater uniformity and consistency between the two agencies in
supervising banking organizations,
and to help banking organizations in
their financial planning.
The guidelines divide institutions
into three categories based on total
assets: community banks, regional
banks, and multinational banks. Specific capital ratios, comparing two
measurements of capital to total
assets, were established for community and regional banking organizations. Capital ratios for multinational organizations (in general, those
with more than $15 billion in assets)
will be established and monitored on
an individual basis, in recognition of
the differences in method of operation
and risk exposure of each. The Board
stressed that its assessment of capital
November 25, 1981—
levels will take into account the unique
Capital Adequacy Guidelines
qualitative factors of individual organizations.
The Board adopted guidelines for
assessing the capital adequacy of certain member banks and bank holding 1981—Discount Rates
companies.
The Board approved three changes in
Votes for this action: Messrs. the basic discount rate during 1981.
Volcker, Schultz, Wallich, Partee, Each change involved a full percentMrs. Teeters, Messrs. Rice, and
Gramley. Votes against this action: age point: an increase from 13 percent to 14 percent in early May and
None.




Board Policy Actions
reductions from 14 percent to 13 percent in late October and to 12 percent
in early December. The Board voted
on four other occasions to turn down
requests for changes in the basic rate
submitted by individual Federal Reserve Banks.
During the year the Board also
approved four changes in the surcharge above the basic discount rate
on frequent borrowings by institutions
with deposits of $500 million or
more. These changes included an increase from 3 percentage points to
4 percentage points in May and subsequent reductions to 3 percentage
points in September and to 2 percentage points in October. The surcharge was removed entirely in November.
In August the Board approved the
establishment of a new rate schedule
for credit advanced over an extended
period to banks and thrift institutions
that are under sustained liquidity
pressure. The new schedule provided
for a rate equal to the basic discount
rate for the first 60 days of borrowing, 1 percentage point above the
basic rate for the next 90 days, and
2 percentage points above the basic
rate thereafter.
The specific reasons for the Board's
decisions are reviewed below. In
reaching those decisions the Board
also took into account the economic
and financial developments that are
covered in more detail elsewhere in
this REPORT. A listing of the Board's
discount rate actions during 1981,
including the votes on the actions,
follows this review.
January to Early May: No Change
In mid-January the Board turned
down a request by one Federal Reserve Bank to raise the basic discount



77

rate from 13 percent, the level in
effect since early December 1980, to
14 percent. The other eleven Banks
had proposed that the current rate be
maintained. At the time of the
Board's action, most short-term market rates were considerably above the
basic discount rate and some of those
rates, notably the federal funds rate,
were also above the surcharge rate
of 16 percent. The Board decided,
however, that a rise in the discount
rate would not be desirable in the
circumstances prevailing early in the
year. Short-term market rates, although still relatively high, had declined appreciably from their peaks
in December, and little or no growth
had occurred in key measures of
money over the course of recent
weeks. In reaching its decision the
Board also gave weight to uncertainties regarding the outlook for fiscal
policy and economic activity.
Short-term interest rates fell substantially over the balance of the
first quarter, and in early April the
Board considered requests by three
Federal Reserve Banks to lower or
eliminate the surcharge of 3 percentage points on frequent borrowings by
large depository institutions. The
Board disapproved those requests in
light of its concern that, given surrounding circumstances, such action
might give an unintended signal of
an easing in the general course of
monetary policy. In the latter connection, the Board took account of
decisions at a recent meeting of the
Federal Open Market Committee relating to the continuing objective of
restraining the growth of money and
credit. Later in April the Board for
similar reasons turned down another
request by one Federal Reserve Bank
to eliminate the surcharge.

78

Board Policy Actions

ment borrowing by depository instiEarly May: Increase in
Basic Discount Rate and Surcharge tutions remained relatively high.

During the summer months most
short-term market rates fluctuated
in a range somewhat below their May
peaks, and then they began to trend
irregularly lower during September.
No requests to change discount rates
were submitted by the Federal Reserve Banks until the latter part of
this period, when several Banks proposed reductions in the surcharge.
On August 20 the Board approved
the establishment of a rate schedule
on borrowings for extended periods
by depository institutions that were
under sustained liquidity pressure.
The schedule included a rate of 14
percent, equal to the basic rate at that
time, for the first 60 days of borrowing, 15 percent for the next 90 days,
and 16 percent thereafter. The timing of the Board's action was associated with the receipt of several applications for borrowing under the
System's extended credit program. It
was also associated with a request by
the Federal Home Loan Bank Board
that, in light of market conditions
Mid-May to Mid-September:
existing then, the Federal Reserve
No Change
provide supplemental funding to help
During the latter part of May the meet the liquidity needs of the memBoard disapproved two requests to ber institutions of the Federal Home
raise the basic discount rate further Loan Bank System. The extended
to 15 percent. In reaching these de- credit program had been developed
cisions the Board took account of earlier by the Federal Reserve in conindications that monetary growth had formance with the provisions of the
weakened markedly in previous Monetary Control Act of 1980. Its
weeks. The Board also noted that purpose was to help all types of
most short-term market rates had depository institutions—commercial
edged down from peaks reached ear- banks, savings and loan associations,
lier in the month. In those circum- mutual savings banks, and credit
stances, the Board concluded that a unions—to adjust to sustained liquidhigher basic rate was not desirable ity pressures.
even though the basic rate at that
In reaching its decision on the new
time was considerably below most rate schedule the Board emphasized
short-term market rates and adjust- the need, for monetary policy reasons,

By late April and early May the
money market had come under substantial pressure and short-term market rates had risen sharply, to levels
well above the basic discount rate.
Federal funds were trading at rates
considerably above the surcharge rate,
and adjustment borrowing by depository institutions had jumped to relatively high levels. Growth in Ml-B
accelerated markedly in April, and
expansion in the broader measures of
money remained rapid. In these circumstances the Board approved an
increase of 1 percentage point in the
basic discount rate to a level of 14
percent and an increase of 1 percentage point in the surcharge to 4
percentage points above the basic
rate. These actions were intended to
underscore the System's determination to curb excessive monetary expansion and thereby to exert a restraining influence on inflationary
expectations.




Board Policy Actions
to discourage an unduly large and persisting expansion in extended borrowings by banks and thrift institutions.
The expansion in reserves associated
with such borrowing is similar to
System open market purchases in
providing reserves to support growth
in the nation's money supply. A rising schedule of rates based on the
duration of the borrowing would help
to restrain the demand for extended
credit and the associated expansion
in reserves, especially when taken in
conjunction with a complementary
policy of lending by the Federal Home
Loan Bank System to its member
institutions.
The Board also approved the application of the new schedule of rates to
loans extended to institutions that
were borrowing for extended periods
because of exceptional individual circumstances.

Late September through December:
Reduction in Basic Discount Rate;
Reduction and Removal of
Surcharge
During the latter part of September
the Board approved a reduction in the
surcharge from 4 percentage points
to 3 percentage points above the basic
discount rate. This action was taken
in recognition of the sizable declines
in short-term rates during previous
weeks, including a decline in the federal funds rate to levels below the
surcharge rate. Borrowings by depository institutions for short-term
adjustment purposes had also fallen
substantially on average. The Board
emphasized that the action was a technical response to developments in the
money market and that it did not
signal a change in the continuing
policy of the Federal Reserve to restrain growth in money and credit.



79

The Board approved another reduction in the surcharge during the
first part of October—from 3 percentage points to 2 percentage points
—following further declines in the
federal funds rate and in other shortterm market rates. Like the previous
reduction, this action was a technical
adjustment to money market developments and was not intended to indicate a change in the basic monetary
policy objective of restraining growth
in money and credit.
In late October the Board approved a reduction of 1 percentage
point in the basic discount rate to a
level of 13 percent. Short-term interest rates had continued to move
lower in previous weeks; Treasury bill
rates had, in fact, fallen below the
discount rate. During its consideration of this action the Board reviewed
but turned down requests to reduce
or eliminate the surcharge. A few
members expressed a preference for
lowering the surcharge instead of the
basic rate, but no member favored
reducing both rates at the same time.
It was felt that under immediately
prevailing circumstances the two actions together might generate unwarranted expectations of an easier
monetary policy.
In mid-November, following further declines in short-term market
rates, the Board voted to eliminate
the remaining surcharge of 2 percentage points. Federal funds were
trading at levels well below the surcharge rate, and no borrowings were
currently outstanding at that rate.
In these circumstances, the Board
concluded that the surcharge was no
longer necessary.
In early December the Board approved a reduction from 13 percent
to 12 percent in the basic discount

80

Board Policy Actions

rate. The purpose of this action was
to bring the basic rate into better
alignment with short-term market
rates. The Board noted that federal
funds had been trading below the
basic discount rate and adjustment
borrowings had fallen to low levels,
especially since mid-November.
Over the balance of the year, the
Board considered but took no action
on a request from one Federal Reserve Bank to reduce the basic discount rate by an additional percentage
point. Monetary growth had accelerated over the course of previous
weeks and short-term market rates
had risen somewhat since early December. However, the current slowdown in business activity was continuing and its extent and duration were
subject to a great deal of uncertainty.
In these circumstances the Board
decided to defer a decision on the
pending action.
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 depository
institutions 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 establish new rates or to
change existing rates.
Reference is made in this report to
the basic discount rate, which is the
rate on discounts and advances to
depository institutions for short-term
adjustment credit. A surcharge rate,
ranging up to 4 percentage points,
was imposed during much of the year
on frequent borrowings for adjust


ment purposes by institutions with
deposits of $500 million or more.
Frequent borrowings were redefined
during the year as those that occur in
successive statement weeks or in more
than 4 weeks in a moving 13-week
period that includes the current week
and the 12 preceding weeks. Other
categories of discount window credit
include advances made over extended
periods to depository institutions that
are under sustained liquidity pressure.
Such extended credit may also be provided when exceptional circumstances
or practices adversely affect a particular depository institution. Finally, socalled seasonal credit may be provided
for periods longer than those permitted under adjustment credit to
assist smaller institutions in meeting
regular needs for funds arising from
certain expected movements in their
deposits and loans.
As of December 31, 1981, the
structure of rates was as follows: a
basic rate of 12 percent for shortterm adjustment credit; a rate for
seasonal credit of 12 percent; and
rates on extended credit of 12 percent
for the first 60 days of borrowing,
13 percent for the next 90 days of
borrowing, and 14 percent after 150
days. No surcharge was in effect at
year-end 1981.
January 12, 1981
The Board disapproved an action
taken by the directors of the Federal
Reserve Bank of St. Louis on January 8, 1981, to increase the basic
discount rate from 13 percent to
14 percent.
Votes for this action: Messrs. Schultz,
Partee, Mrs. Teeters, and Mr. Rice.
Votes against this action: None. Absent and not voting: Messrs. Volcker,
Wallich, and Gramley.

Board Policy Actions
April 1, 1981
The Board disapproved actions taken
by the directors of the Federal Reserve Banks of Chicago and St. Louis
on March 26 to reduce the surcharge
imposed on large depository institutions that borrow frequently from the
Federal Reserve from 3 percentage
points above the basic discount rate
to W2 and 1 percentage points respectively; and by the directors of
the Federal Reserve Bank of Atlanta
on March 27 to eliminate the surcharge.
Votes for this action: Messrs. Volcker,
Schultz, Wallich, Partee, and Rice.
Votes against this action: None. Absent and not voting: Mrs. Teeters and
Mr. Gramley.

81

Mrs. Teeters, Messrs. Rice, and
Gramley. Votes against these actions:
None.
The Board subsequently approved
similar actions taken by the directors
of the Federal Reserve Bank of
Chicago, effective May 8, 1981.
May 20, 1981
The Board disapproved an action
taken by the directors of the Federal
Reserve Bank of San Francisco on
May 14, 1981, to increase the basic
discount rate to 15 percent.
Votes for this action: Messrs. Schultz,
Partee, Mrs. Teeters, Messrs. Rice,
and Gramley. Votes against this action: None. Absent and not voting:
Messrs. Volcker and Wallich.

April 20, 1981

May 26, 1981

The Board disapproved an action
taken by the directors of the Federal
Reserve Bank of Atlanta on April 10
to eliminate the 3-percentage-point
surcharge on frequent borrowings by
large depository institutions.

The Board disapproved an action
taken by the directors of the Federal
Reserve Bank of Atlanta on May 22,
1981, to increase the basic discount
rate to 15 percent.

Votes for this action: Messrs. Volcker,
Schultz, Wallich, Partee, Mrs. Teeters,
Messrs. Rice, and Gramley. Votes
against this action: None.

Votes for this action: Messrs. Volcker,
Wallich, Partee, Mrs. Teeters, Messrs.
Rice, and Gramley. Votes against
this action: None. Absent and not
voting: Mr. Schultz.

May 4, 1981
Effective May 5, 1981, the Board
approved actions taken by the directors of the Federal Reserve Banks of
Boston, New York, Philadelphia,
Cleveland, Richmond, Atlanta, St.
Louis, Minneapolis, Kansas City,
Dallas, and San Francisco to increase
the basic discount rate from 13 percent to 14 percent and to raise the
surcharge from 3 percentage points
to 4 percentage points.
Votes for these actions: Messrs.
Volcker, Schultz, Wallich, Partee,



August 20, 1981
Effective August 20, 1981, the Board
approved actions taken by the directors of the Federal Reserve Banks of
New York, Philadelphia, and Dallas
to establish a structure of rates for
extended credit to banks and thrift
institutions under sustained liquidity
pressure as follows: 14 percent for
the first 60 days of borrowing, 15 percent for the next 90 days, and 16 percent thereafter. The basic discount
rate of 14 percent and the 4-percentage-point surcharge were left un-

82

Board Policy Actions

changed by this action. The Board
also decided that it would be appropriate to establish a conforming structure of rates for extended credit to
individual institutions when exceptional circumstances or practices involve only that institution.
Votes for these actions: Messrs.
Volcker, Schultz, Wallich, Partee,
and Gramley. Votes against these
actions: None. Absent and not voting: Mrs. Teeters and Mr. Rice.
The Board subsequently approved
actions to establish the above rate
structures taken by the directors of
the other Federal Reserve Banks,
effective on the dates indicated: Richmond, Atlanta, and Minneapolis, August 2 1 ; San Francisco, August 24;
Cleveland and St. Louis, August 25;
Chicago, August 27; Dallas (rate for
extended credit to particular institutions in special circumstances) and
Kansas City, August 28; and Boston,
September 4, 1981.
September 2 1 , 1981
Effective September 22, 1981, the
Board approved actions taken by the
directors of all of the Federal Reserve
Banks to reduce the surcharge from
4 percentage points to 3 percentage
points above the basic discount rate
of 14 percent.
Votes for this action: Messrs. Volcker,
Schultz, Partee, Mrs. Teeters, Messrs.
Rice, and Gramley. Vote against this
action: Mr. Wallich.
Mr. Wallich voted against this action because he felt that, given prevailing economic and financial conditions, a reduction might convey a
misleading signal regarding the outlook for monetary policy.



Effective October 1, 1981, the
Board also approved a modification
of the rules governing the surcharge;
specifically the surcharge would apply
to institutions with deposits of $500
million or more that borrowed in
successive statement weeks or in more
than 4 weeks during a moving 13-week
period that included the current week
and the 12 preceding weeks.
Votes for this action: Messrs. Volcker,
Schultz, Wallich, Partee, Mrs. Teeters,
Messrs. Rice, and Gramley. Votes
against this action: None.
October 9, 1981
Effective October 12, 1981, the Board
approved actions taken by the directors of the Federal Reserve Banks of
Philadelphia, Richmond, Atlanta,
Chicago, Dallas, and San Francisco,
and effective October 13, 1981, the
Federal Reserve Banks of Boston,
New York, Cleveland, St. Louis, Minneapolis, and Kansas City to reduce
the surcharge to 2 percentage points
(from 3 percentage points) above the
basic discount rate of 14 percent. The
variation in effective dates resulted
from differences in observance of the
Columbus Day holiday.
Votes for this action: Messrs. Volcker,
Schultz, Wallich, Partee, Mrs. Teeters,
and Mr. Gramley. Votes against this
action: None. Absent and not voting: Mr. Rice.
October 30, 1981
Effective November 2, 1981, the
Board approved actions taken by the
directors of the Federal Reserve
Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Chicago, St. Louis, Minneapolis, and
San Francisco to reduce the basic

Board Policy Actions
discount rate from
13 percent.

14 percent to

Votes for this action: Messrs. Volcker,
Schultz, Wallich, Partee, Mrs. Teeters,
Messrs. Rice, and Gramley. Votes
against this action: None.
The Board subsequently approved
similar actions taken by the directors
of the Federal Reserve Banks of
Atlanta and Kansas City, effective
November 3, and the Federal Reserve
Bank of Dallas, effective November 6,
1981.
Also on October 30, the Board
disapproved actions taken by the
directors of the Federal Reserve Bank
of San Francisco on October 22 to
eliminate the 2-percentage-point surcharge on frequent borrowings by
large depository institutions; and by
the directors of the Federal Reserve
Bank of St. Louis on October 27 to
reduce the surcharge to 1 percentage
point.
Votes for this action: Messrs. Volcker,
Schultz, Wallich, Partee, Mrs. Teeters,
Messrs. Rice, and Gramley. Votes
against this action: None.

November 16, 1981
Effective November 17, 1981, the
Board approved actions taken by the
directors of the Federal Reserve
Banks of Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneap-




83

olis, Dallas, and San Francisco to
remove the surcharge on borrowings
by large depository institutions.
Votes for this action: Messrs. Volcker,
Schultz, Wallich, Partee, Mrs. Teeters,
Messrs. Rice, and Gramley. Votes
against this action: None.
The Board subsequently approved
similar actions taken by the directors
of the Federal Reserve Banks of Boston and New York, effective November 18, and the Federal Reserve
Banks of Philadelphia and Kansas
City, effective November 20, 1981.
Also on November 16, the Board
disapproved actions taken by the
directors of the Federal Reserve
Banks of Richmond and San Francisco to reduce the basic discount rate
from 13 percent to 12 percent.
Votes for this action: Messrs. Volcker,
Schultz, Wallich, Partee, Mrs. Teeters,
Messrs. Rice, and Gramley. Votes
against this action: None.

December 3, 1981
Effective December 4, 1981, the
Board approved actions taken by the
directors of all of the Federal Reserve
Banks to reduce the basic discount
rate from 13 percent to 12 percent.
Votes for this action: Messrs. Volcker,
Schultz, Wallich, Partee, Mrs. Teeters,
Messrs. Rice, and Gramley. Votes
against this action: None.

84

Record of Policy Actions of the
Federal Open Market Committee
The record of policy actions of the mean that all members of the ComFederal Open Market Committee is mittee were equally agreed as to the
presented in the ANNUAL REPORT of reasons for the particular decision or
the Board of Governors pursuant to as to the precise operations in the
the requirements of section 10 of the open market that were called for to
Federal Reserve Act. That section implement the general policy.
provides that the Board shall keep a
During 1981 the policy record for
complete record of the actions taken each meeting was released a few days
by the Board and by the Federal Open after the next regularly scheduled
Market Committee on all questions meeting and was subsequently pubof policy relating to open market lished in the Federal Reserve Bulletin.
operations, that it shall record therein
Policy directives of the Federal
the votes taken in connection with the Open Market Committee are issued
determination of open market poli- to the Federal Reserve Bank of New
cies and the reasons underlying each York as the Bank selected by the
such action, and that it shall include Committee to execute transactions
in its ANNUAL REPORT to the Con- for the System Open Market Acgress a full account of such actions.
count. In the area of domestic open
In the pages that follow, there are market activities, the Federal Reserve
entries with respect to the policy ac- Bank of New York operates under
tions taken at the meetings of the two separate directives from the Open
Federal Open Market Committee Market Committee: an Authorization
held during the calendar year 1981, for Domestic Open Market Operaincluding the votes on the policy deci- tions and a domestic policy directive.
sions made at those meetings as well In the foreign currency area, it
as a resume of the basis for the deci- operates under an Authorization for
sions. The summary descriptions of Foreign Currency Operations and a
economic and financial conditions foreign currency directive. These four
are based on the information that was instruments are shown below in the
available to the Committee at the form in which they were in effect at
time of the meetings, rather than on the beginning of 1981. Changes in the
data as they may have been revised instruments during the year are
later.
reported in the records for the inIt will be noted from the record of dividual meetings.
policy actions that in some cases the
decisions were by unanimous vote Authorization for Domestic
and that in other cases dissents were Open Market Operations
recorded. The fact that a decision in
favor of a general policy was by a In Effect January 1, 1981
large majority, or even that it was by
1. The Federal Open Market Com
unanimous vote, does not necessarily mittee 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 market discount rates,
prime bankers acceptances with maturities of up to 9 months at the time
of acceptance that (1) arise out of 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
Digitized exceed $100 million;
for FRASER


FOMC Policy Actions

85

(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) (a) to
lend to the Treasury such amounts of
securities held in the System Open Market Account as may be necessary from
time to time for the temporary accommodation of the Treasury, under such
conditions as the Committee may specify;
and (b) to purchase directly from the
Treasury for renewable periods not to
exceed 30 days, when authorized by the
Board of Governors of the Federal Reserve System pursuant to an affirmative
vote of not less than five members, 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
short-term 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 of
V* of 1 percent below the discount rate
of the Federal Reserve Bank of New

86

FOMC Policy Actions

York at the time of such purchases and
provided 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 ensure 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 Open Market Account to Government securities
dealers and to banks participating in
Government securities clearing arrangements conducted through a Federal
Reserve Bank, under such instructions
as the Committee may specify from
time to time.
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 basis set forth
in paragraph 1 (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 1 (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.

Domestic Policy Directive
In Effect January 1, 1981
The information reviewed at this meeting suggests that real GNP is recovering
further in the fourth quarter from the

sharp contraction in the second quarter,


while prices on the average continue to
rise rapidly. In October industrial production and nonfarm payroll employment expanded substantially for the
third consecutive month, and the unemployment rate remained around IVi
percent. The value of retail sales
changed little, following four months of
recovery. The rise in the index of average hourly earnings over the first ten
months of 1980 was somewhat more
rapid than in 1979.
The weighted average value of the
dollar in exchange markets on balance
has risen further over the past month.
The U.S. trade deficit was essentially
unchanged in September, and the rate
in the third quarter was sharply lower
than that in the first half.
Growth in Ml-A and Ml-B moderated further in October but was still
relatively rapid; growth in M2 accelerated slightly, reflecting a pickup in expansion of its nontransactions component. From the fourth quarter of
1979 to October, growth of Ml-A was
in the upper part of the range set by the
Committee for growth over the year
ending in the fourth quarter of 1980,
while growth of Ml-B and M2 was
somewhat above the upper limits of their
ranges. Expansion in commercial bank
credit was rapid in October, although
not so rapid as in August and September. Market interest rates have risen
sharply in recent weeks; average rates on
new home mortgage commitments have
continued upward. On November 14
the Board of Governors announced an
increase in Federal Reserve discount
rates from 11 to 12 percent and a surcharge of 2 percentage points on frequent borrowing of large member banks
from Federal Reserve Banks.
The Federal Open Market Committee
seeks to foster monetary and financial
conditions that will help to reduce inflation, encourage economic recovery, and
contribute to a sustainable pattern of
international transactions. At its meeting in July, the Committee agreed that
these objectives would be furthered by
growth of Ml-A, Ml-B, M2, and M3
from the fourth quarter of 1979 to the
fourth quarter of 1980 within ranges of
3Vi to 6 percent, 4 to 6Vi percent, 6 to
9 percent, and 6Vi to 9Vi percent respectively. The associated range for
bank credit was 6 to 9 percent. For

FOMC Policy Actions
the period from the fourth quarter of
1980 to the fourth quarter of 1981,
the Committee looked toward a reduction in the ranges for growth of Ml-A,
Ml-B, and M2 on the order of Vi percentage point from the ranges adopted
for 1980, abstracting from institutional
influences affecting the behavior of the
aggregates. These ranges will be reconsidered as conditions warrant.
In the short run, the Committee
seeks behavior of reserve aggregates
consistent with growth of Ml-A, Ml-B,
and M2 over the period from September
to December at annual rates3 of about
IVi percent, 5 percent, and 1 A percent
respectively, or somewhat less, provided
that in the period before the next regular
meeting the weekly average federal
funds rate remains within a range of 13
to 17 percent.
If it appears during the period before
the next meeting that the constraint on
the federal funds rate is inconsistent
with the objective for the expansion of
reserves, the Manager for Domestic
Operations 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, 1981
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
Digitized financial institutions:
for FRASER


Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks

87

Italian lire
Japanese yen
Mexican pesos
Netherlands guilder
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 overall open
position in all foreign currencies not
exceeding $1.0 billion, unless a larger
position is expressly authorized by the
Committee. [Note. An overall open
position not exceeding $8.9 billion had
been expressly authorized by the Committee on December 19, 1978, and was
in effect as of January 1, 1981.] For
this purpose, the overall 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.
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:
Any changes in the terms of existing

88

FOMC Policy Actions

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
BankofFrance
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

250
1,000
2,000
250
3,000
2,000
6,000
3,000
5,000
700
500
250 x
500
4,000
600
1,250

1. Pursuant to an action taken by the Committee on May 20, 1980, the amount of the
reciprocal currency arrangement with the Bank
of Sweden was raised to $500 million, effective
May 23, 1980, for a period of one year, after
which it will revert to its former level of
$300 million.

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
of 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. When appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. Government securities may be
purchased from foreign central banks
under agreements for repurchase of
such securities within 30 calendar days.
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
members 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 Foreign Operations, 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.

FOMC Policy Actions
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, 1981
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 IMF Article
IV, Section 1.
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




89

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 IMF
Article IV.

90

FOMC Policy Actions

Meeting Held
on February 2-3, 1981
Domestic Policy Directive
The information reviewed at this
meeting indicated that real gross national product expanded at a 5 percent annual rate in the fourth quarter. Average prices, as measured by
the fixed-weight price index for
gross domestic business product, increased at an annual rate of about
9l/2 percent. Over the year ending in
the fourth quarter of 1980, real GNP
was unchanged and nominal GNP
rose about 93/4 percent.
The index of industrial production
rose an estimated 1 percent in December, following substantial gains
in each of the four preceding
months. By December, the index
had regained much of the ground lost
earlier in the year. Capacity utilization in manufacturing increased further in December to 79.8 percent,
4.9 percentage points above its July
trough but well below earlier peaks.
Nonfarm payroll employment expanded substantially in December
for the fifth consecutive month, and
the unemployment rate was essentially unchanged at about 7V2 percent. Growth in manufacturing employment slowed in December, but
the average workweek lengthened
0.3 hour to 40.2 hours.
The dollar value of retail sales
declined in December, according to
the advance report, after a sizable
gain over the preceding six months.
Sales of new automobiles were at an
annual rate of 9 million units in December, virtually unchanged from
the rate in the preceding five
months.
The Department of Commerce
survey of business spending plans
taken in November and December



suggested that expenditures for plant
and equipment would rise about \0%
percent in 1981, following an expansion of about 83/4 percent in 1980.
After allowance for respondents' expectations for price increases, however, the survey results implied no
increase in real outlays for 1981.
In December private housing
starts remained at the annual rate of
about lV2 million units recorded in
the previous three months. Newly
issued permits for residential construction declined, and sales of both
new and existing houses fell somewhat.
Producer prices of finished goods
continued to rise at a rapid pace in
December, but the rate of increase
over the fourth quarter was considerably below the exceptional pace in
the third quarter. Consumer prices
also rose at a rapid pace in December, reflecting not only continued
sharp advances in food prices and a
renewed upsurge in energy prices,
but sizable increases in most other
categories as well. Over the year
ending in December 1980, producer
prices of finished goods and consumer prices rose about H3/4 and 12V2
percent respectively, compared with
increases of about 12V2 and I3V4
percent over the preceding year.
Over the last few months of 1980,
the rise in the index of average hourly earnings was at about the rapid
pace recorded earlier in the year.
Over the year 1980 the index was up
9V2 percent compared with a rise of
about 8 percent over 1979.
In foreign exchange markets the
trade-weighted value of the dollar
against major foreign currencies had
risen about 3!/2 percent over the interval since the Committee's meeting in December. There were divergent changes against individual cur-

FOMC Policy Actions
rencies: the dollar appreciated substantially against the German mark
and other continental European currencies, and depreciated somewhat
against the pound sterling, the Japanese yen, and the Canadian dollar.
The U.S. trade deficit in the fourth
quarter of 1980 widened from the
exceptionally low rate in the third
quarter but remained substantially
less than the rate in the first half.
The value of exports rose slightly in
the fourth quarter, but the value of
imports increased by a larger
amount, mainly as a result of higher
oil imports.
At its meeting on December 1819, the Committee had decided that
open market operations in the period
until this meeting should be directed
toward expansion of reserve aggregates associated with growth of
M-1A, M-1B, and M-2 over the first
quarter along a path consistent with
the ranges for growth in 1981 contemplated in July 1980, abstracting
from the effects of shifts into NOW
accounts; the midpoints of those
ranges were 4l/4 percent, 43/4 percent, and 7 percent respectively.1
The members agreed that some
shortfall in growth would be acceptable in the near term if it developed
in the context of reduced pressures
1. M-1A comprises demand deposits at
commercial banks plus currency in circulation. M-1B comprises M-1A plus negotiable
order of withdrawal (NOW) and automatic
transfer service (ATS) accounts at banks and
thrift institutions, credit union share draft
accounts, and demand deposits at mutual
savings banks. M-2 contains M-1B and savings and small-denomination time deposits at
all depository institutions, overnight repurchase agreements (RPs) at commercial banks,
overnight Eurodollars held at Caribbean
branches of member banks by U.S. residents
other than banks, and money market mutual
fund shares.



91

in the money market. If it appeared
during the period before the next
regular meeting that fluctuations in
the federal funds rate, taken over a
period of time, within a range of 15
to 20 percent were likely to be inconsistent with the monetary and related reserve paths, the Manager for
Domestic Operations was promptly
to notify the Chairman, who would
then decide whether the situation
called for supplementary instructions from the Committee.
During the course of the intermeeting period, incoming data for
the latter part of December and subsequent weeks indicated that a
shortfall in growth of the monetary
aggregates, after adjustment for the
estimated effects of shifts into NOW
accounts, had developed from the
short-run objectives set forth by the
Committee. Required reserves contracted in relation to the supply of
reserves being made available
through open market operations. After the turn of the year, member
bank borrowings declined; they averaged about $1.2 billion in the two
weeks ending January 14, compared
with about $1.6 billion in the preceding four weeks. Nevertheless, the
federal funds rate remained in a
range of 19 to 20 percent, perhaps in
part because of unusually strong demands for excess reserves and an
inclination of some banks to increase
their overnight borrowings in the
funds market in expectation of nearterm declines in interest rates. Borrowings moved up to an average of
$1.8 billion in the statement week
ending January 28, while the funds
rate declined to a range of 17 to 18
percent in the days preceding this
meeting.
M-1A and M-1B declined in December at annual rates of about 11

92

FOMC Policy Actions

percent and 9 percent respectively.
Growth in these aggregates in January was affected greatly by the introduction of NOW accounts on a nationwide basis as of December 31,
1980. It had been anticipated that
shifts into NOW accounts would significantly retard the growth of M-1A
and enhance the growth of M-1B
during 1981. Such shifts during the
first few weeks of the year were
much larger than generally had been
expected, and available data suggested a very sharp decline in M-1A
in January and a substantial rise in
M-1B. However, after adjustment
for shifts into NOW accounts based
on surveys of commercial banks and
other data, both M-1A and M-1B
were estimated to have risen moderately in January.
Growth in M-2 slowed markedly
in December to an annual rate of
about 23/4 percent. Growth apparently accelerated to a relatively rapid
rate in January, however, as money
market mutual fund shares posted a
sizable increase and growth in smalland large-denomination time deposits remained substantial.
Growth in total credit outstanding
at U.S. commercial banks slowed
somewhat in December from the
rapid pace of other recent months.
The slowing reflected a deceleration
in the pace of investment acquisitions and in expansion of loans, including business loans. However,
the moderation in the growth of business loans at commercial banks was
accompanied by stepped-up issuance of commercial paper and longer-run debt instruments by nonfinancial businesses. For the period from
the fourth quarter of 1979 to the
fourth quarter of 1980 total commercial bank credit grew at an annual
rate of 7.9 percent, well within the 6



to 9 percent range adopted by the
Committee for the year.
Market interest rates fluctuated
considerably over the intermeeting
period but declined on balance from
their mid-December highs. At the
time of this meeting, short-term
rates were down about 2l/4 to 4V2
percentage points and long-term
rates about V2 to 1 percentage point
from their December peaks. During
the intermeeting interval, the prime
rate charged by commercial banks
on short-term business loans was
raised to a record 2iy 2 percent and
subsequently reduced to 20 percent.
In home mortgage markets, average
rates on new commitments for fixedrate loans at savings and loan associations reached 14.95 percent in the
latter part of December and edged
off slightly in subsequent weeks.
The staff projections presented at
this meeting suggested that the
buoyancy of economic activity in the
final quarter of 1980 would extend
into the first quarter of the new year
but that over the four quarters of
1981 real GNP would change little
for the second consecutive year.
Such a sluggish performance of the
economy would be associated with
an increase in the rate of unemployment during 1981. The rise in the
fixed-weight price index for gross
domestic business product was projected to remain rapid, although not
quite so rapid in the second half of
the year as in the first half.
In the Committee's discussion of
the economic situation and outlook,
members continued to stress the difficulties of forecasting output and
prices in the current environment of
high inflation and volatile expectations, and they recognized also the
uncertainties surrounding the implementation of the fiscal and other

FOMC Policy Actions
economic policies soon to be announced by the new administration
inaugurated on January 20. In response to a request to set forth their
views concerning the outlook, a
number of members expressed the
opinion that the most likely outcome
for the period through the fourth
quarter of 1981 was little change in
real GNP with a significant increase
in the unemployment rate, as projected by the staff. Other members
anticipated a small rise in real GNP
over the year, generally with somewhat less increase in unemployment,
and two members projected a small
decline in real GNP with a larger
increase in unemployment. All of the
members expected continuation of a
high rate of inflation over the year,
although the anticipated rates of increase differed.
At this meeting, the Committee
completed the review, begun at the
meeting in December 1980, of the
ranges for growth of monetary aggregates over the period from the
fourth quarter of 1980 to the fourth
quarter of 1981 within the framework of the Full Employment and
Balanced Growth Act of 1978. At its
meeting in July 1980, the Committee
had reaffirmed ranges for growth
over the year ending in the fourth
quarter of 1980 of 3 V2 to 6 percent for
M-1A, 4 to 6V2 percent for M-1B, 6
to 9 percent for M-2, and 6l/2 to 9l/2
percent for M-3, with an associated
range of 6 to 9 percent for growth of
commercial bank credit.2 For the
year ending in the fourth quarter of
1981, the Committee had tentatively
indicated reductions on the order of
2. M-3 is M-2 plus large-denomination time
deposits at all depository institutions and term
RPs at commercial banks and savings and
loan associations.



93

!/2 percentage point in the ranges for
growth of M-1A, M-1B, and M-2,
abstracting from institutional influences affecting the behavior of the
aggregates.
In reviewing the ranges for monetary growth in 1981, the Committee
noted that from the fourth quarter of
1979 to the fourth quarter of 1980,
M-1A grew 5 percent; M-1B, 1%
percent; M-2, 9/ 4 percent; and M-3,
10 percent. For M-1A and M-1B,
however, actual growth in 1980 was
not comparable to the Committee's
ranges for the year. The ranges had
been established on the assumption
of virtually no further shifts into
ATS-NOW accounts from demand
and other accounts; but as the year
progressed, and particularly after
passage of the Monetary Control
Act, further significant shifts became apparent. Taking account of
the estimated effects of such shifts,
which have no significance for monetary policy, the basic range for
growth of M-1B in 1980 could be
adjusted upward by about !/2 percentage point and the range for
M-1A could be adjusted downward
by about ll/4 percentage points.
Alternatively, measured growth of
M-1A could be adjusted upward to
6!/4 percent and that of M-1B adjusted downward to 63/4 percent. With
either method of adjustment, growth
of each aggregate marginally exceeded the upper bound of its range.
In contemplating ranges for 1981,
the Committee continued to face unusual uncertainties concerning the
forces affecting monetary growth, in
part because of sizable variations
evident in the demand for both narrowly and broadly defined money in
relation to nominal GNP. In the current year, moreover, relationships
among the measured rates of growth

94

FOMC Policy Actions

for the monetary aggregates were
subject to large changes resulting
from the introduction of NOW accounts on a nationwide basis as authorized by the Monetary Control
Act of 1980. Specifically, shifts into
NOW accounts from demand deposits were expected to retard growth of
M-1A significantly while shifts from
savings deposits and other interestbearing assets would enhance
growth of M-1B. However, estimates of the impact of such shifts on
measured growth of the two aggregates could only be tentative, because of the overall size of the shift
and uncertainty about the ultimate
sources of the funds. In January, the
first month after their nationwide
authorization, NOW accounts expanded far more than had been anticipated. It was expected that the
flow of funds into NOW accounts
would subside in coming months,
and also that the proportion of the
funds representing shifts from demand deposits would be gradually
reduced.
Shifts of funds into NOW accounts were not expected to affect
growth of the broader monetary aggregates significantly, because virtually all of the funds likely to be
shifted into such accounts are already included in M-2. It was anticipated, however, that growth of both
M-2 and M-3 would be somewhat
stronger in relation to growth of the
narrower aggregates, adjusted for
the flows into NOW accounts, than
projected in July 1980, when ranges
for 1981 were first considered. The
public has shown an increased preference for holding savings in deposits included in the nontransaction
component of M-2, as changes in
regulatory ceilings on interest rates
have made small time and savings



deposits more attractive relative to
market instruments and as money
market mutual funds have become
more popular.
In the Committee's discussion of
its objectives for 1981, the members
agreed that some further reduction
in the ranges for monetary growth,
abstracting from the effects of shifts
into NOW accounts, was appropriate in line with the longstanding goal
of contributing to a reduction in the
rate of inflation and providing the
basis for restoration of economic
stability and sustainable growth in
output of goods and services. The
members differed somewhat in their
views concerning the extent of the
reductions that might be made and
also about the particular aggregates
for which longer-run ranges should
be specified.
For M-1A and M-1B, most members favored specification of ranges,
abstracting from the NOW account
effect, that were V2 percentage point
lower than the ranges for 1980. One
member advocated a reduction of 1
percentage point, particularly because growth over 1980 had appreciably exceeded the midpoints of the
adjusted ranges for that year. Another member preferred not to specify
ranges for the narrower monetary
aggregates at all, because he believed that the NOW account effects
could not be reliably estimated. In
the view of one other member, confusion could be lessened by focusing
attention entirely on M-1B, because
it would be less subject than M-l A to
the distorting effects of the flows
into NOW accounts.
Members differed somewhat more
in their views concerning the broader monetary aggregates, in part because of uncertainty about the potential effects of interest rate

FOMC Policy Actions

95

relationships on the behavior of the mercial bank credit was 6 to 9 pernontransaction component. Reflect- cent. It was emphasized that at an
ing an expectation that growth of the early date the Committee might wish
broader aggregates would increase to reconsider the longer-run ranges
relative to that of the narrower ag- in the light of developing conditions
gregates adjusted for expansion of and that in any case it would reconNOW accounts, a number of mem- sider them in July within the framebers favored specification of ranges work of the Full Employment and
slightly higher than those for 1980. Balanced Growth Act of 1978. It was
However, most members believed understood, moreover, that the disthat sufficient allowance for the pos- torting effects of shifts into NOW
sibility of relatively stronger growth accounts would change during the
of the broader aggregates would be year and that other short-run factors
made by reiterating the 1980 ranges might cause considerable variation
for them in association with ranges in annual rates of growth from one
for the narrower aggregates that month to the next and from one
were V2 percentage point lower than quarter to the next. The Committee
those for 1980. In this connection, it planned that periodically the staff
was stressed that specification of would provide estimates of the efranges rather than precise rates for fects that shifts into ATS-NOW acgrowth over the year inherently pro- counts were having on the reported
vided for some change in relative data.
rates of growth among the monetary
The Committee adopted the following
aggregates, and that growth of both ranges for growth in monetary aggreM-2 and M-3 might well be in the gates for the period from the fourth quarupper portions of their ranges. Even ter of 1980 to the fourth quarter of 1981,
so, growth of the broader aggregates abstracting from the impactaof introduction of NOW accounts on nationwide
would be less than actual growth in basis: M-1A, 3 to 5V2 percent; M-1B, 31/,
1980. One member preferred to fo- to 6 percent; l M-2, 6 to 9 percent; and
l
cus exclusively on the narrower ag- M-3, 6 /2 to 9 /2 percent. The associated
range for bank credit is 6 to 9 percent.
gregates, not specifying ranges for
the broader aggregates.
Votes for this action: Messrs.
At the conclusion of the discusVolcker, Gramley, Guffey, Morris,
Partee, Rice, Roos, Schultz, Solosion, the Committee decided to
mon, Mrs. Teeters, and Mr. Winn.
specify ranges for growth of M-1A
Vote against this action: Mr. Wallich.
and M-1B, adjusted for the effects of
Mr. Wallich dissented from this
flows into NOW accounts, that were
!/2 percentage point lower than those action because he thought that the
for 1980 and to retain the 1980 ranges ranges adopted for growth of M-1A
for M-2 and M-3. Thus, the Commit- and M-1B were too high. He betee adopted the following ranges for lieved that somewhat lower ranges
growth of the monetary aggregates would provide for adequate moneover the period from the fourth quar- tary growth in 1981, because he exter of 1980 to the fourth quarter of pected a further downward shift in
1981: M-1A, 3 to 5l/2 percent; M-1B, money demand and also because
3l/2 to 6 percent; M-2, 6 to 9 percent; growth of the monetary aggregates
and M-3, 6V2 to 9l/2 percent. The over the past year generally had exassociated range for growth of com- ceeded the specified ranges.



96

FOMC Policy Actions

In reviewing its objectives for
monetary growth from December
1980 to March 1981 in light of the
ranges adopted for the year from the
fourth quarter of 1980 to the fourth
quarter of 1981, the Committee took
note of the recent behavior of the
monetary aggregates. Specifically,
growth of the aggregates in both the
third and the fourth quarters of 1980
(quarterly average basis) had been
strong, more than compensating for
the weakness earlier in the year.
From the fourth quarter to January
1981, however, the annual rates of
growth of M-1A and M-1B had fallen
below the lower ends of the ranges
for 1981, reflecting the sharp declines in those aggregates in December and the only partial recovery in
January.
In that light, the members in general agreed that operations in the
period before the next regular meeting scheduled for March 31 should
be directed toward a gradual restoration of growth of M-1A and M-1B
(adjusted for NOW account effects)
to rates consistent with their longerrun ranges. Almost all members
were willing to accept continuation
of relatively slow growth in relation
to the ranges for 1981 at least
through March in recognition that it
would generally compensate for the
rapid growth during the fourth quarter of 1980, which carried growth for
the year slightly above the upper
bounds of the ranges for the year.
They differed somewhat over the
acceptable amount of growth. One
member preferred to direct operations toward raising growth of the
aggregates to the midpoints of their
1981 ranges by March.
In accepting the gradual approach
toward encouraging rates of monetary growth consistent with the



ranges adopted for 1981, several
members commented on the danger
of potentially confusing interpretations of policy intentions and also of
possible instability in financial markets. It was observed, for example,
that efforts to raise monetary growth
promptly toward the longer-run
paths could have the undesirable
consequences of encouraging first
relatively rapid growth and then an
abrupt deceleration. A few members
also suggested that the gradual approach to making up the shortfall
would be acceptable provided that it
proved to be compatible with relative stability or some easing in money market pressures.
At the conclusion of the discussion, the Committee decided to seek
behavior of reserve aggregates associated with growth of M-1A and
M-1B over the period from December to March at annual rates of 5 to 6
percent and in M-2 of about 8 percent, abstracting from the impact of
flows into NOW accounts. Those
rates were associated with growth of
M-1A, M-1B, and M-2 from the
fourth quarter of 1980 to the first
quarter of 1981 at annual rates of
about 2 percent, 23/4 percent, and 7
percent respectively. The members
recognized that shifts into NOW accounts would continue to distort
measured growth in M-1A and M-1B
to an unpredictable extent and that
operational paths would have to be
developed in the light of evaluation
of those distortions. If it appeared
during the period before the next
regular meeting that fluctuations in
the federal funds rate, taken over a
period of time, within a range of 15
to 20 percent were likely to be inconsistent with the monetary and related reserve paths, the Manager for
Domestic Operations was promptly

FOMC Policy Actions
to notify the Chairman, who would
then decide whether the situation
called for supplementary instructions from the Committee.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real GNP expanded
substantially in the fourth quarter of 1980
and that prices on the average continued
to rise rapidly. In December industrial
production and nonfarm payroll employment expanded further, and the unemployment rate was essentially unchanged
at about 7l/2 percent. Retail sales declined, however, following a sizable gain
over the preceding six months. Housing
starts were about unchanged for the third
month. Over the last few months of 1980,
the rise in the index of average hourly
earnings was at about the rapid pace
recorded earlier in the year.
The weighted average value of the
dollar in exchange markets has risen
further over the past six weeks. The
U.S. trade deficit in the final quarter of
1980 widened from the exceptionally low
rate in the third quarter but remained
substantially less than the rate in the first
half.
M-1A and M-1B declined sharply in
December; in January, after adjustment
of the actual figures for the estimated
effects of shifts into NOW accounts,
these aggregates recovered in part.
Growth in M-2 slowed markedly in December but accelerated in January.
Some moderation of the expansion in
commercial bank credit in December and
early January was accompanied by
stepped-up financing of nonfinancial
businesses through issuance of commercial paper and longer-term debt instruments. Market interest rates have declined on balance from their highs of
mid-December.
The Federal Open Market Committee
seeks to foster monetary and financial
conditions that will help to reduce inflation, encourage economic recovery, and
contribute to a sustainable pattern of
international transactions. The Committee agreed that these objectives would be
furthered by growth of M-1A, M-1B,



97

M-2, and M-3 from the fourth quarter of
1980 to the fourth quarter of 1981 within
ranges of 3 to 5/2 percent, 3>x/2 to 6
percent, 6 to 9 percent, and 6l/2 to 9l/2
percent respectively, abstracting from
the impact of introduction of NOW accounts on a nationwide basis. The associated range for bank credit was 6 to 9
percent. These ranges will be reconsidered as conditions warrant.
In the short run the Committee seeks
behavior of reserve aggregates consistent with growth in M-1A and M-1B from
December to March at annual rates of 5
to 6 percent and in M-2 at a rate of about
8 percent, abstracting from the impact of
flows into NOW accounts. These rates
are associated with growth of M-1A,
M-1B, and M-2 from the fourth quarter
of 1980 to the first quarter of 1981 3at
annual rates of about 2 percent, 2 /4
percent, and 7 percent respectively. It is
recognized that shifts into NOW accounts will continue to distort measured
growth in M-1A and M-1B to an unpredictable extent, and operational reserve
paths will be developed in the light of
evaluation of those distortions. If it appears during the period before the next
meeting that fluctuations in the federal
funds rate, taken over a period of time,
within a range of 15 to 20 percent are
likely to be inconsistent with the monetary and related reserve paths, the Manager for Domestic Operations 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.
Volcker, Gramley, Guffey, Morris,
Partee, Rice, Roos, Schultz, Solomon, and Winn. Votes against this
action: Mrs. Teeters and Mr. Wallich.
Mrs. Teeters dissented from this
action because she believed that the

specifications adopted for monetary
growth over the first quarter were
unduly restrictive. She preferred
specification of higher rates for monetary growth over the first quarter,
consistent with the ranges adopted
for monetary growth over the whole
year, in association with a lower

98

FOMC Policy Actions

intermeeting range for the federal
funds rate.
Mr. Wallich dissented from this
action because he preferred to set a
higher range for the federal funds
rate in order to help avoid a repetition of the sharp drop in interest
rate§ that had occurred in the second
quarter of 1980.
In late February, incoming data
indicated that M-l A and M-1B, after
adjustment for the estimated effects
of shifts into NOW accounts, were
growing at rates well below those
consistent with the Committee's objectives for the period from December to March. Consequently, member bank demands for reserves had
eased in relation to the supply of
reserves being made available
through open market operations,
and member bank borrowings had
fallen appreciably. At the same time,
growth of M-2 and M-3 appeared to
be strong. These developments were
associated with a decline in the federal funds rate to around 15 percent,
the lower end of the range of 15 to 20
percent specified by the Committee,
raising the question of whether the
situation called for supplementary
instructions from the Committee.
In a telephone conference on February 24, the Committee adopted the
following modification of the domestic policy directive adopted on February 3:
In light of the relatively strong growth
of M-2 and M-3 and the substantial easing recently in money market conditions,
as well as uncertainties about the interpretation of the behavior of M-l, the
Committee on February 24 agreed to
accept some shortfall in growth of M-l A
and M-1B from the specified rates in the
domestic policy directive adopted on
February 3 as consistent with developments in the aggregates generally and the
objectives for the year.



Votes for this action: Messrs.
Volcker, Gramley, Guffey, Morris,
Partee, Rice, Schultz, Mrs. Teeters,
and Mr. Winn, Vote against this action: Mr. Roos. Absent: Messrs. Solomon and Wallich.

Mr. Roos dissented from this action because he believed that it
would tend to prolong unduly the
shortfall in growth of M-l A and
M-1B from the Committee's ranges
for the year. In the circumstances,
he preferred to reduce the lower
limit of the intermeeting range for
the federal funds rate in order to
encourage a more prompt pickup in
growth of the narrowly defined monetary aggregates.
Meeting Held on March 31, 1981
1. Domestic Policy Directive
The information reviewed at this
meeting suggested that real gross
national product expanded substantially in the first quarter of 1981, but
there were signs of a slowing of the
expansion in economic activity during the quarter. Average prices, as
measured by the fixed-weight price
index for gross domestic business
product, continued to rise rapidly.
The dollar value of retail sales
advanced appreciably further over
the first two months of the year,
following a sizable gain over the
second half of 1980. Increases in the
value of sales in the two-month period were fairly widespread and were
especially strong in the automotive
group, at general merchandise
stores, and at gasoline service stations. Unit sales of new domestic
automobiles surged in late February
and remained strong through the
first 20 days of March, largely because of price concessions.
The index of industrial production

FOMC Policy Actions
declined an estimated 0.5 percent in
February, after three months of diminishing gains. Capacity utilization
in manufacturing edged up in January but declined 0.7 percentage point
in February to 79.3 percent.
Private housing starts dropped in
February to an annual rate of about
1.2 million units; during the preceding six months housing starts had
been in a range of 1.4 million to 1.6
million units. Newly issued permits
for residential construction edged
down in January and declined sharply in February. Combined sales of
new and existing homes fell in January for the fourth consecutive
month.
Nonfarm payroll employment
changed little in February following
a large increase in January, and the
unemployment rate, at 7.3 percent,
was essentially unchanged. Employment continued to expand in trade
and service establishments but declined sharply in construction. In
manufacturing, employment growth
slowed further and the average
workweek fell 0.6 hour to 39.8
hours.
The Department of Commerce
survey of business spending plans
taken in January and February suggested that current-dollar expenditures for plant and equipment would
rise about 10!/4 percent in 1981, following an expansion of about 9Vi
percent in 1980. The survey results
implied that constant-dollar outlays
would change little in 1981 from their
level in 1980.
Producer prices of finished goods
rose at an annual rate of about IOVA
percent in January and February,
close to the average rate in the second half of 1980. The rise in the
consumer price index slowed in January to an annual rate of about 83/4



99

percent but accelerated in February
to a rate of 11V2 percent. Over the
two-month period food prices rose
only slightly on balance, and the rise
in homeownership costs slowed substantially. But prices of energy items
surged, reflecting in large part the
effects of decontrol of oil prices. The
rise in the index of average hourly
earnings of private nonfarm production workers was little changed from
the pace recorded during 1980.
In foreign exchange markets the
trade-weighted value of the dollar
against major foreign currencies rose
further following the Committee's
meeting in early February to a peak
at midmonth. Subsequently, the dollar declined somewhat on balance,
as short-term interest rates in continental European countries rose appreciably, both in absolute terms
and relative to interest rates on dollar-denominated assets. In the days
immediately preceding this meeting
the dollar traded at rates somewhat
above the level prevailing at the time
of the last meeting. The U.S. trade
deficit in January and February was
at about the average monthly rate of
the final quarter of 1980. The value
of imports rose substantially, in association with the expansion in U.S.
economic activity, and the value of
exports also rose markedly.
At its meeting on February 2-3,
the Committee had decided that
open market operations in the period
until this meeting should be directed
toward expansion of reserve aggregates associated with growth in
M-1A and M-1B over the period
from December to March at annual
rates of 5 to 6 percent and in M-2 of
about 8 percent, abstracting from the
impact of flows into NOW accounts.
Those rates were associated with
growth of M-1A, M-1B, and M-2

100

FOMC Policy Actions

from the fourth quarter of 1980 to the
first quarter of 1981 at annual rates
of about 2 percent, 23/4 percent, and
7 percent respectively. If it appeared
during the period before the next
regular meeting that fluctuations in
the federal funds rate, taken over a
period of time, within a range of 15
to 20 percent were likely to be inconsistent with the monetary and related reserve paths, the Manager for
Domestic Operations was promptly
to notify the Chairman, who would
then decide whether the situation
called for supplementary instructions from the Committee.
Early in the intermeeting period,
incoming data for the latter part of
January and the early weeks of February indicated that a shortfall in
growth of the narrowly defined monetary aggregates (M-1A and M-1B),
after adjustment for the estimated
effects of shifts into NOW accounts,
had developed from the short-run
objectives set forth by the Committee. Required reserves and the demand for reserves contracted in relation to the supply of reserves being
made available through open market
operations, and member bank borrowings declined to an average of
about $1.2 billion in the three statement weeks ending February 18
from an average of about $1.5 billion
in the preceding three weeks. The
federal funds rate fell to an average
of about 153/4 percent in the week
ending February 18, from about 17!/4
percent at the time of the Committee's meeting in early February; and
it declined further in subsequent
days to around the lower end of the
range of 15 to 20 percent that had
been specified by the Committee.
In a telephone conference on February 24, the Committee agreed to
accept some shortfall in growth of



M-1A and M-1B from the rates specified in the directive adopted on February 3, in light of indications of
relatively strong growth of M-2 and
M-3 and the substantial easing that
had occurred in money market conditions, as well as of uncertainties
about the interpretation of the behavior of M-l. It was recognized that
the operational path for nonborrowed reserves consistent with the
Committee's decision might lead to
some further easing in money market conditions, depending upon rates
of growth in the monetary aggregates. In fact, member bank borrowings declined in early March, and the
federal funds rate eased for a while
in mid-March to about 13 percent.
Subsequently, however, demands
for reserves strengthened, and in the
days immediately preceding this
meeting, the federal funds rate was
around 15 percent.
M-1A and M-1B, adjusted for the
estimated effects of shifts into NOW
accounts, declined somewhat in
February and changed little on balance over the first two months of the
year. The narrower aggregates expanded substantially, however, in
the first half of March. Growth in
M-2 picked up to an annual rate of
about IVi percent in February from
53/4 percent in January; and it apparently accelerated considerably in
March, because of large flows into
money market mutual funds and
some strengthening in the total of
small-denomination time and savings deposits in addition to the expansion in the narrower aggregates.
Expansion in total credit outstanding at U.S. commercial banks
slowed substantially in February to
an annual rate of 8V4 percent, about
one-half the pace recorded in January. The deceleration reflected a re-

FOMC Policy Actions
duced pace of investment acquisitions and weakness in loans,
particularly security loans and business loans. The moderation in
growth of business loans at commercial banks was accompanied by
stepped-up issuance of publicly offered bonds and continued heavy net
issuance of commercial paper by
nonfinancial corporations. In addition, U.S. nonbank residents expanded their outstanding loans from
foreign branches of U.S. banks.
Short-term market interest rates
declined substantially on balance
over the intermeeting interval: in private short-term markets, yields fell 2
to 3^percentage points; in the Treasury bill market, yields fell somewhat less, about 3A to 2 percentage
points, as the Treasury raised large
amounts of new money through bill
auctions and heavy seasonal issuance of cash management bills. Most
long-term interest rates rose lA to Vi
percentage point during the intermeeting period. The prime rate
charged by commercial banks on
short-term business loans was reduced in steps to YIV2 percent from
the level of \9Vi to 20 percent prevailing at the time of the last Committee meeting. In home mortgage
markets, average rates on new commitments for fixed-rate loans at savings and loan associations rose about
40 basis points to 15.40 percent.
The staff projections presented at
this meeting suggested that economic activity, even while expanding
substantially in the first quarter, had
been losing its upward momentum,
and that real GNP was likely to
change little over the period ahead.
Such a sluggish performance of the
economy would be accompanied by
a small increase in the unemployment rate. The rise in the fixed


101

weight price index for gross domestic business product was projected
to remain rapid, although somewhat
less so in the latter part of the year
than in the first half.
In the Committee's discussion of
the economic situation and outlook,
members noted the unanticipated
strength in activity in the autumn
and winter, and they continued to
stress the difficulties of forecasting
output and prices in the current environment. A number of members expressed the view that little change in
real GNP over the balance of 1981
was an improbable development;
and of these, all but one thought that
a stronger performance was more
likely than a weaker one. While no
member voiced disagreement with
the staff projection of continuation
of a rapid rise in overall prices, it
was suggested that inflationary expectations might be moderating a bit
and also that toward the end of the
year the rise in the consumer price
index might be lessening.
At its meeting on February 2-3,
the Committee had adopted the following ranges for growth of the monetary aggregates over the period
from the fourth quarter of 1980 to the
fourth quarter of 1981: M-1A and
M-1B, 3 to 5Vi percent and V/2 to 6
percent respectively, after adjustment for the effects of flows into
NOW accounts; M-2, 6 to 9 percent;
and M-3, 6V2 to 9Vi percent. The
associated range for growth of commercial bank credit was 6 to 9 percent. It was understood that the distorting effects of shifts into NOW
accounts would change during the
year and that other short-run factors
might cause considerable variation
in annual rates of growth from one
month to the next and from one
quarter to the next.

102

FOMC Policy Actions

In the Committee's discussion of
policy for the period immediately
ahead, it was noted that growth of
the narrowly defined monetary aggregates (adjusted for the effects of
NOW accounts) was slow over the
first three months of 1981 as a
whole, despite the strength that had
developed in early March. It was
pointed out that the slow growth
during the first quarter could be welcomed as an offset to the rapid
growth in the fourth quarter of 1980.
Growth of M-2, in contrast, apparently had been fairly rapid; its nontransaction component had been
buoyed by record expansion in money market mutual funds, which had
more than offset weakness in smalldenomination time and savings deposits.
A staff analysis suggested that the
sluggish growth in the narrowly defined money supply in the first quarter, and the extraordinary increase
in the velocity of money, might have
been related to the high interest rates
in the fourth quarter of 1980 and to
the year-end introduction of NOW
accounts on a nationwide basis,
which together might have led to
intensive reconsideration of cash
management techniques. Looking to
the second quarter, another sharp
increase in the velocity of narrowly
defined money appeared unlikely,
and demands for transaction balances were expected to expand substantially in association with growth
of nominal GNP. It was anticipated
that the nontransaction component
of M-2 would remain strong and that
the pickup in the demand for transaction balances would contribute to
rapid growth of M-2.
In considering objectives for monetary growth over the second quarter, members of the Committee in



general focused on the interrelated
issues of the desirable speed of
growth of narrowly defined money,
consistent with the range for the
year, and the weight that should be
given to M-2. In the interest of simplification, the Committee decided
to focus on M-1B as the measure of
transaction balances and to omit any
reference to M-1A in its statement of
monetary objectives for the short
run. After adjustment for the effects
of shifts into NOW accounts, growth
in the two would be similar.
Concerning operations in the period before the next regular meeting,
scheduled for mid-May, the view
was expressed that the demand for
money could well be expanding substantially but that it would be appropriate to establish a reserve path
consistent with growth at a relatively
modest pace. It was also suggested
that the weakness in growth of
adjusted M-1B in the early months of
the year might be a misleading indicator of the behavior of transaction
balances, mainly because of the rapid growth of money market mutual
funds; some part of the large flows
into th^se funds might also be regarded as transaction balances.
Thus, it was argued that some greater weight than previously should be
given to the behavior of M-2 in appraising the behavior of the monetary aggregates. On the other hand,
it was observed that the weight given
to M-2 should not be increased because the ranges for 1981 adopted at
the Committee's meeting in early
February might not allow sufficiently for the expectation that growth of
the broader aggregate in 1981 would
tend to increase relative to that of
M-1B.
With respect to the federal funds
rate, it was stressed that the Com-

FOMC Policy Actions
mittee specified an intermeeting
range for fluctuations over a period
of time to provide a mechanism for
initiating timely consultations between regularly scheduled meetings
whenever it appeared that fluctuations within the specified range were
proving to be inconsistent with the
objectives for the behavior of reserve and monetary aggregates.
Thus, the limits of the range were
indicative of the conditions under
which the Committee would wish to
consult to reexamine its short-run
objectives and were not intended as
binding constraints on System operations pending such consultations.
For the coming intermeeting period,
various proposals were made for the
range, all of them more or less centered on the rate of 15 percent that
had prevailed in the market most
recently.
At the conclusion of the discussion, the Committee decided to seek
behavior of reserve aggregates associated with growth of M-1B over the
period from March to June at an
annual rate of Slh percent or somewhat less, after allowance for the
impact of flows into NOW accounts,
and growth in M-2 at an annual rate
of about IOV2 percent. In evaluating
the behavior of the aggregates, it
was agreed that greater weight than
before would be given to the behavior of M-2. The members recognized
that shifts into NOW accounts
would continue to distort measured
growth in M-1B to an unpredictable
extent and that operational paths
would have to be developed in the
light of evaluation of those distortions. If it appeared during the period before the next scheduled meeting that fluctuations in the federal
funds rate, taken over a period of
time, within a range of 13 to 18



103

percent were likely to be inconsistent with the monetary and related
reserve paths, the Manager for Domestic Operations was promptly to
notify the Chairman, who would
then decide whether the situation
called for supplementary instructions from the Committee.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real GNP expanded
substantially in the first quarter of 1981,
but there were signs of a slowing of the
expansion in economic activity during
the quarter; prices on the average continued to rise rapidly. While retail sales
advanced appreciably over the first two
months of the year, industrial production
declined in February after three months
of diminishing gains, and housing starts
dropped from the moderate pace that
had prevailed during the preceding six
months. Nonfarm payroll employment
changed little in February following a
large increase in January; the unemployment rate, at 7.3 percent, was essentially
unchanged. Over the first two months of
1981, the rise in the index of average
hourly earnings was little changed from
the rapid pace recorded during 1980.
The weighted average value of the
dollar against major foreign currencies
rose further following the Committee's
meeting in early February to a peak at
midmonth but subsequently declined
somewhat on balance. Short-term interest rates in continental European countries have risen appreciably since midFebruary, absolutely and in relation to
interest rates on dollar-denominated assets. The U.S. trade deficit in January
and February was at about the average
monthly rate of the final quarter of 1980.
M-1A and M-1B, adjusted for the estimated effects of shifts into NOW accounts, changed little over the first two
months of the year but expanded substantially in the first half of March.
Growth in M-2 accelerated in the course
of the quarter, and partial data suggest
considerable strength in March, in part
because of large flows into money market mutual funds. On balance since early

104

FOMC Policy Actions

February, short-term market interest
rates have fallen substantially while
longer-term market rates have risen
somewhat.
The Federal Open Market Committee
seeks to foster monetary and financial
conditions that will help to reduce inflation, encourage economic recovery, and
contribute to a sustainable pattern of
international transactions. At its meeting
in early February, the Committee agreed
that these objectives would be furthered
by growth of M-1A, M-1B, M-2, and M-3
from the fourth quarter of 1980 to the
fourth quarter of 1981 within ranges of 3
to 5Vz percent, V/i to l 6 percent, 6 to 9
percent, and 6V2 to 9 A percent respectively, abstracting from the impact of
introduction of NOW accounts on a nationwide basis. The associated range for
bank credit was 6 to 9 percent. These
ranges will be reconsidered as conditions
warrant.
In the short run the Committee seeks
behavior of reserve aggregates consistent with growth in M-1B from March to
June at an annual rate of 5!/2 percent or
somewhat less, after allowance for the
impact of flows into NOW accounts, and
growth in M-2 at an annual rate of about
10V2 percent. It is recognized that shifts
into NOW accounts will continue to distort measured growth in M-1B to an
unpredictable extent, and operational reserve paths will be developed in the light
of evaluation of those distortions. If it
appears during the period before the next
meeting that fluctuations in the federal
funds rate, taken over a period of time,
within a range of 13 to 18 percent are
likely to be inconsistent with the monetary and related reserve paths, the Manager for Domestic Operations 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.
Volcker, Boehne, Boykin, Corrigan,
Partee, Rice, Schultz, Solomon, Mrs.
Teeters, and Mr. Winn. Vote against
this action: Mr. Wallich. Absent:
Messrs. Gramley and Mayo. (Mr.
Winn voted as alternate for Mr.
Mayo.)
Mr. Wallich dissented from this



action because he favored specification of lower monetary growth rates
for the period from March to June
than those adopted at this meeting
along with a higher intermeeting
range for the federal funds rate. In
light of the recent strength of economic activity, he believed that policy had not been as restrictive as
supposed, in part because money
market mutual funds and other
sources of liquidity had contributed
to an increase in the velocity of
M-1B, and that continuation of excessive strength in activity posed the
greater danger for the period ahead.
On May 6 the Committee held a
telephone conference. Available
data indicated that growth in M-1B,
after adjustment for shifts of funds
into NOW accounts from other interest-bearing assets, had accelerated markedly in April to an annual
rate of about 14 percent. However,
in view of the very low growth of
shift-adjusted M-1B in the early
months of 1981 and the sharp decline
in late 1980, the April acceleration
brought the level of M-1B only to
around the midpoint of the VA to 6
percent range established by the
Committee for 1981. Growth in M-2
had decelerated slightly in April; expansion of this aggregate was still
relatively rapid, however, and its
level in April was somewhat above
its longer-run range for the year.
While the level of M-1B in April
was only at the midpoint of the longer-run range, its growth in the month
was more rapid than the pace of 5V2
percent or somewhat less specified
for the period from March to June by
the Committee at its March 31 meeting. Consequently, strong pressures
had developed on bank reserve positions as less reserves were supplied
through open market operations

FOMC Policy Actions
than banks demanded. Indeed, nonborrowed reserves were estimated
to have declined at an annual rate of
about 12 percent in April. In adjusting to the constrained availability of
reserves, banks had a negative excess reserve position on the average
in the latter part of April and increased borrowings from the discount window sharply in late April
and early May; borrowings averaged
about $2.4 billion in the two weeks
ending May 6. The federal funds
rate, which had been in a 15 to 15xh
percent range for most of April, rose
considerably in late April and early
May as banks intensified their efforts
to acquire reserves; trading in recent
days had been in a range of 17 to 20
percent. Effective May 5, the basic
Federal Reserve discount rate was
raised from 13 to 14 percent and the
surcharge on frequent borrowing by
large depository institutions was increased from 3 to 4 percentage
points, placing the surcharge rate at
18 percent.
In the telephone conference on
May 6, the Committee agreed that in
the brief period before the next regular meeting scheduled for May 18,
the reserve path would continue to
be set on the basis of the short-run
objectives for monetary growth established at the March 31 meeting. It
was noted that for a time actual
money growth might be high relative
to those objectives in view of the
recent performance of the monetary
aggregates. The Committee recognized that short-term market interest
rates might well fluctuate around
levels prevailing in recent days and
that the federal funds rate might continue to exceed the upper end of the
range indicated for consultation at
the previous meeting. The Committee agreed to consult further if nec-




105

essary to maintain adequate restraint
on the monetary and credit aggregates.
On May 6, the Committee agreed that
through the period before the next regular meeting the reserve path should continue to be set on the basis of the shortrun objectives for monetary growth
established at its meeting on March 31,
recognizing that the federal funds rate
might continue to exceed the upper end
of the range indicated for consultation at
the March 31 meeting.
Votes for this action: Messrs.
Volcker, Boehne, Boykin, Corrigan,
Gramley, Rice, Schultz, Solomon,
Mrs. Teeters, and Mr. Winn. Votes
against this action: None. Absent:
Messrs. Partee and Wallich. (Mr.
Winn voted as an alternate member.)
2. Review of Continuing
Authorizations
At this, 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, 1981, 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 foreign currency directive,
and the procedural instructions with
respect to foreign currency operations in the forms in which they were
currently outstanding.
Votes for these actions: Messrs.
Volcker, Boehne, Boykin, Corrigan,
Partee, Rice, Schultz, Solomon, Mrs.
Teeters, Messrs. Wallich, and Winn.
Votes against these actions: None.
Absent: Messrs. Gramley and Mayo.
(Mr. Winn voted as alternate for Mr.
Mayo.)

106

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
such lending of securities was reasonably necessary to the effective
conduct of open market operations
and to the implementation 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 for Domestic Operations that the
lending activity in question remained
reasonably necessary and that, accordingly, the authorization should
remain in effect subject to annual
review.

was expressly authorized by the
Committee. The language suggested
that authorizations of larger positions would be temporary. On December 19, 1978, the Committee had
authorized an open position of $8
billion (shown as a footnote in the
authorization), which had remained
in effect since that date. At this
meeting, the Committee voted to incorporate the long-standing limit of
$8 billion in the text of paragraph
ID.
Paragraph 3 specifies that all
transactions in foreign currencies be
at prevailing market rates except in
the case of certain transactions with
foreign central banks. At this meeting, the Committee voted to delete a
reference to an exception that is no
longer relevant and to add language
spelling out circumstances in which
transactions at nonmarket rates may
be undertaken.
Paragraph 5 is concerned with the
investment of System holdings of
balances of foreign currencies. In
view of a provision in the Monetary
Control Act of 1980 allowing the
System to invest in securities issued
or fully guaranteed by foreign governments, the Committee voted to
limit investment of foreign currency
holdings to liquid forms and generally to instruments having no more
than 12 months remaining to maturity.
The Committee also amended
paragraph 6 to provide that all operations pursuant to the preceding paragraphs be reported promptly, rather
than on a daily basis, to the Foreign
Currency Subcommittee.
As amended, paragraphs ID, 3, 5
and 6 read as follows:

3. Authorization for Foreign
Currency Operations
The Committee adopted several
amendments to the authorization for
foreign currency operations to simplify and clarify its instructions to
the Federal Reserve Bank of New
York and to bring the document up
to date in light of recent developments. None of these amendments
was intended as a change in policy
orientation.
As adopted in December 1976,
paragraph ID authorized the Federal
Reserve Bank of New York, for the
System Open Market Account, to
maintain an overall open position in
1. The Federal Open Market Commitall foreign currencies not to exceed tee authorizes and directs the Federal
$1.0 billion, unless a larger position Reserve Bank of New York, for System




FOMC Policy Actions
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:

D. To maintain an overall open position in all foreign currencies not exceeding $8.0 billion. For this purpose,
the overall 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 denned 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.
3. All transactions in foreign currencies undertaken under paragraph 1(A)
above shall, unless otherwise expressly
authorized by the Committee, be at prevailing market rates. For the purpose of
providing an investment return on System holdings of foreign currencies, or for
the purpose of adjusting interest rates
paid or received in connection with swap
drawings, transactions with foreign central banks may be undertaken at nonmarket exchange rates.
5. Foreign currency holdings shall be
invested insofar as practicable, considering needs for minimum working balances. Such investments shall be in liquid form, and generally have no more
than 12 months remaining to maturity.
When appropriate in connection with
arrangements to provide investment facilities for foreign currency holdings,
U.S. Government securities may be purchased from foreign central banks under
agreements for repurchase of such securities within 30 calendar days.
6. All operations undertaken pursuant
to the preceding paragraphs shall be reported promptly to the Foreign Currency
Subcommittee and the Committee. 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



107

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 Foreign Operations 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.
Votes for these actions: Messrs.
Volcker, Boehne, Boykin, Corrigan,
Partee, Rice, Schultz, Solomon, Mrs.
Teeters, Messrs. Wallich, and Winn.
Votes against these actions: None.
Absent: Messrs. Gramley and Mayo.
(Mr. Winn voted as alternate for Mr.
Mayo.)
4. Agreement with Treasury
to Warehouse
Foreign Currencies
At its meeting on January 17-18,
1977, the Committee had agreed to a
suggestion by the Treasury that the
Federal Reserve undertake to
"warehouse" foreign currencies—
that is, to make spot purchases of
foreign currencies from the Exchange Stabilization Fund and
simultaneously to make forward
sales of the same currencies at the
same exchange rate to the ESF. Pursuant to that agreement, the Committee had agreed that the Federal
Reserve would be prepared to warehouse for the Treasury or for the
ESF up to $5 billion of eligible foreign currencies. At this meeting the
Committee reaffirmed the agreement
on the terms adopted on March 18,
1980, with the understanding that it
would be subject to annual review.

108

FOMC Policy Actions

The index of industrial production, which had increased 0.5 percent in March, rose 0.4 percent in
April. An increase in auto assemblies, to a rate substantially above
the recent pace of sales, was a major
factor in the April advance, and output of business equipment and space
and defense products exhibited considerable strength. A strike cut production of coal in half and limited the
Meeting Held on May 18, 1981
rise in the total industrial production
Domestic Policy Directive
index by about 0.3 percentage point.
Nonfarm payroll employment
The information reviewed at this
meeting suggested that growth of changed little in March and April
real gross national product was after adjustment for strikes, and the
slowing in the current quarter from unemployment rate was stable at 7.3
the rapid pace in the first quarter, percent. In April employment conbut activity currently appeared tinued to expand in service indusstronger than had been projected at tries but declined considerably in
the time of the Committee's meeting retail trade establishments and in
on March 31. Real GNP had grown construction. Small employment
at an annual rate of 6V2 percent in the gains were recorded in the manufacfirst quarter, according to prelimi- turing sector, and the average facnary estimates of the Commerce De- tory workweek edged up 0.1 hour to
partment, and additional data that 40.1 hours.
became available after release of the
Private housing starts in March
preliminary estimates suggested that remained at the annual rate of about
growth had been even more rapid. 1 VA million units recorded in FebruAverage prices, as measured by the ary; during the preceding six
fixed-weight price index for gross months, housing starts had been in a
domestic business product, have range of 1.4 million to 1.6 million
continued to rise rapidly in the cur- units. Sales of new homes in March
rent quarter, but somewhat less so continued at the reduced pace of
than earlier in the year.
recent months, and sales of existing
The dollar value of total retail homes declined further.
sales increased slightly further in
Producer prices of finished goods
March but declined appreciably in rose at an annual rate of 9Vi percent
April, reflecting mainly a sharp drop in April, compared with an average
in sales of new cars in response to rate of 12 percent during the first
the ending of manufacturers' price quarter. The surge of energy prices
rebates. Unit sales of new automo- that had characterized earlier
biles fell from an annual rate of 10.3 months of the year abated in April,
million units in March to 8.1 million and prices of consumer foods were
units in April. The value of sales unchanged. Prices of crude foodexcluding automobiles and building stuffs, however, rose sharply. The
materials registered sizable gains in rise in the consumer price index
both March and April.
slowed in March, reflecting a slowVotes for this action: Messrs.
Volcker, Boehne, Boykin, Corrigan,
Partee, Rice, Schultz, Solomon, Mrs.
Teeters, Messrs. Wallich, and Winn.
Votes against this action: None. Absent: Messrs. Gramley and Mayo.
(Mr. Winn voted as alternate for Mr.
Mayo.)




FOMC Policy Actions
ing in price increases of energy items
and continued moderate increases in
food prices and homeowner ship
costs. Prices of other consumer
items continued to rise at a relatively
rapid pace. Over the first four
months of 1981, the rise in the index
of average hourly earnings of private
nonfarm production workers was
slightly less rapid than the pace recorded during 1980.
In foreign exchange markets the
trade-weighted value of the dollar
against major foreign currencies had
risen by about 8V2 percent since the
final days of March to its highest
level in Vh years. In March the U.S.
trade deficit declined sharply, bringing the first-quarter deficit to a level
well below the average in 1980. The
value and volume of exports rose
substantially from the fourth quarter, and the value of imports increased moderately.
At its meeting on March 31, the
Committee had decided that open
market operations in the period until
this meeting should be directed toward behavior of reserve aggregates
consistent with growth in M-1B from
March to June at an annual rate of
5V2 percent or somewhat less, after
allowance for the impact of flows
into NOW accounts, and growth in
M-2 at an annual rate of about \Wi
percent. If it appeared during the
period before the next regular meeting that fluctuations in the federal
funds rate, taken over a period of
time, within a range of 13 to 18
percent were likely to be inconsistent with the monetary and related
reserve paths, the Manager for Domestic Operations was promptly to
notify the Chairman, who would
then decide whether the situation
called for supplementary instructions from the Committee.



109

In the latter part of April, incoming data suggested that M-1B, after
adjustment for the estimated effects
of shifts into NOW accounts, was
growing at a rate well above the
short-run objectives set forth by the
Committee. Consequently, required
reserves increased more than the
supply of reserves being made available through open market operations. Banks adjusted to the constrained availability of reserves by
reducing excess reserves and by increasing borrowings from the Federal Reserve. In the two statement
weeks ending May 6, member bank
borrowings averaged about $2.4 billion, compared with an average of
about $1 billion in the first three
statement weeks after the meeting
on March 31; and the federal funds
rate, which had averaged around
15 !/2 percent in the first three weeks
of April, fluctuated within a range of
17 to 20 percent in the last days of
April and the first days of May. On
May 4 the Board of Governors announced an increase from 13 to 14
percent in Federal Reserve basic discount rates and an increase from 3 to
4 percentage points in the surcharge
on frequent borrowings of large institutions.
In a telephone conference on May
6, the Committee agreed that in the
brief period before the next regular
meeting scheduled for May 18, the
reserve path would continue to be
set on the basis of the short-run
objectives for monetary growth established on March 31. It was recognized that for a time monetary
growth might be high in relation to
those objectives and that the federal
funds rate might continue to exceed
the upper end of the range indicated
for consultation. In the period remaining until this meeting, bank re-

110

FOMC Policy Actions

serve positions remained under pressure, and federal funds typically
traded between 18 and 19 percent.
Growth in M-1B, adjusted for the
estimated effects of shifts into NOW
accounts, accelerated sharply in
April to an annual rate of about 14
percent. But adjusted M-1B had
grown from the fourth quarter of
1980 to the first quarter of 1981 at an
annual rate of only 1 percent, and its
level in April was well within the
Committee's longer-run range for
that aggregate. M-2 had continued to
grow rapidly in April, and its level
continued above the upper end of its
longer-run range. Growth in the nontransaction component of M-2
slowed markedly, however, as the
total of savings and small-denomination time deposits was about unchanged and inflows into money
market mutual funds slowed.
Total credit outstanding at U.S.
commercial banks registered a slight
decline in March and grew at an
annual rate of about 4Vi percent in
April. Holdings of investments
changed little over the two months,
and growth in loans, particularly
business loans, was quite weak. Net
issues of commercial paper by nonfinancial corporations declined in
April, following expansion at a rapid
pace in the first quarter. Issuance of
publicly offered bonds remained
heavy during April, and the volume
of new equity offerings rose considerably.
Short-term market interest rates
had risen substantially over the period since the Committee's meeting on
March 31: yields on Treasury bills
moved up V/A to 4 percentage points
while yields on private short-term
market instruments increased AVi to
5!/4 percentage points. Most longterm interest rates rose to record




levels and on balance advanced
about 1 percentage point. Over the
intermeeting interval, the prime rate
charged by commercial banks on
short-term business loans was raised
in steps from YlVi percent to \9Vi
percent. In home mortgage markets,
average rates on new commitments
for fixed-rate loans at savings and
loan associations rose above 16 percent, from 15.40 percent at the end
of March.
The staff projections presented at
this meeting suggested that the surge
in growth of real GNP in the first
quarter would be followed by much
slower growth over the rest of 1981.
The rise in the fixed-weight price
index for gross domestic business
product was projected to moderate
as the year progressed but nevertheless to remain rapid.
In the Committee's discussion of
the economic situation and outlook,
members commented on the considerably greater strength in activity in
the first quarter than had been expected, and they continued to stress
the difficulties of economic forecasting currently and the importance of
adhering to longer-term objectives.
While generally anticipating a substantial slowing of growth from the
exceptionally rapid pace now indicated for the first quarter, a number
of members expressed the view that
expansion in activity over the rest of
the year was likely to continue to
exceed the rates typically being forecast. The observation was made that
weakness in demands and activity
appeared to be confined to a few
sectors, albeit such major ones as
housing and automobiles, and that
the risks of a significant decline in
overall activity appeared to be tempered by the prospect that some
accumulated backlogs of demands

FOMC Policy Actions

111

would be activated whenever inter- over the two-month period would
est rates declined. It was also sug- have to be negligible if the specificagested, on the other hand, that high tions adopted on March 31 were to
and volatile interest rates could be- be realized.
gin to have a cumulative effect in
The staff analysis also suggested
dampening activity, and that little that growth of M-2 would be less
was known about the effects of fi- rapid over the second quarter than
nancial stress that might be develop- had been anticipated earlier, reflecting.
ing a slowing of growth in savings
At its meeting on February 2-3, deposits and small-denomination
the Committee had adopted the fol- time deposits as well as continued
lowing ranges for growth of the mon- weakness in money market mutual
etary aggregates over the period funds. Thus, growth of the broader
from the fourth quarter of 1980 to the monetary aggregates might begin to
fourth quarter of 1981: M-1A and move down toward their target
M-1B, 3 to 5V2 percent and Vh to 6 ranges for growth over the year from
percent respectively, after adjust- the fourth quarter of 1980 to the
ment for the estimated effects of fourth quarter of 1981.
flows into NOW accounts; M-2, 6 to
In considering objectives for mon9 percent; and M-3, 6V2 to 9Vi per- etary growth over the remainder of
cent. It was understood that the dis- the quarter, the members in general
torting effects of shifts into NOW agreed that a posture of restraint
accounts would change during the needed to be maintained. They genyear and that other short-run factors erally agreed with the view that it
might cause considerable variation was particularly important to reduce
in annual rates of growth from one growth of the monetary aggregates
month to the next and from one rather quickly, and initial differences
quarter to the next.
in views concerning the precise
In the Committee's discussion of specifications for monetary growth
policy for the period immediately were relatively narrow. In the disahead, it was emphasized that on cussion, a number of points were
March 31 the Committee had estab- emphasized. The indications of conlished an objective for growth of tinuing strength in economic activity
M-1B (adjusted for the estimated ef- combined with the recent exceptionfects of shifts into NOW accounts) al rise in the income velocity of
over the three months from March to money posed the risk of pressure for
June at an annual rate of 5l/z percent excessive expansion in money and
or somewhat less, and that growth in credit as the year developed.
April had greatly exceeded that Growth of the broader monetary agpace. According to a staff analysis, gregates was already somewhat high
some retardation of M-1B growth relative to the Committee's ranges
over the remaining two months of for the year. The indications of some
the quarter was to be expected, in slowing of the rise in the consumer
light of the greater pressure on bank price index did not appear to reflect
reserve positions that had developed as yet any clear relaxation of underrecently and the apparent slowing of lying inflationary pressures, and emgrowth in nominal GNP in the cur- phasis was placed on the importance
rent quarter. But growth of M-1B of conveying a clear sense of re


112

FOMC Policy Actions

straint at a critical time with respect
to inflation and inflationary expectations.
With respect to the federal funds
rate, it was again stressed that the
specification of an intermeeting
range for fluctuations over a period
of time provided a mechanism for
initiating timely consultations between regularly scheduled meetings
when it appeared that fluctuations
within the specific range were proving to be inconsistent with the objectives for the behavior of the reserve
and monetary aggregates. The
ranges proposed for the period
ahead typically were from 16 or 17
percent to 21 or 22 percent.
At the conclusion of the discussion, the Committee decided to seek
behavior of reserve aggregates associated with growth of M-1B from
April to June at an annual rate of 3
percent or lower, after allowance for
the impact of flows into NOW accounts, and growth in M-2 at an
annual rate of about 6 percent. A
shortfall in growth of M-1B from the
two-month rate of 3 percent would
be acceptable, in light of the rapid
growth in April and the objective
adopted by the Committee on March
31 for growth from March to June at
an annual rate of 5Vi percent or
somewhat less. The members recognized that shifts into NOW accounts
would continue to distort measured
growth in M-1B to an unpredictable
extent and that operational paths
would have to be developed in the
light of evaluation of those distortions. The Chairman might call for
Committee consultation if it appeared to the Manager for Domestic
Operations that pursuit of the monetary objectives and related reserve
paths during the period before the
next meeting was likely to be associ-




ated with a federal funds rate persistently outside a range of 16 to 22
percent.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real GNP will grow
much less rapidly in the current quarter,
following the substantial expansion in
the first quarter; prices on the average
have continued to rise rapidly, although
somewhat less so most recently than
earlier in the year. The dollar value of
total retail sales increased slightly further in March, but it declined appreciably in April when sales of new cars fell in
response to the ending of price concessions. Industrial production rose moderately in both months, while nonfarm
payroll employment changed little, after
adjustment for strikes, and the unemployment rate was stable at 7.3 percent.
In March housing starts remained at a
reduced pace. Over the first four months
of 1981, the rise in the index of average
hourly earnings was slightly less rapid
than during 1980.
The weighted average value of the
dollar against major foreign currencies
has risen steadily since the end of March
to its highest level in three and a half
years. The U.S. trade deficit declined
sharply in March, bringing the first-quarter deficit to a level well under the 1980
average.
Growth in M-1B, adjusted for the estimated effects of shifts into NOW accounts, accelerated sharply in April and
growth in M-2 remained rapid. Since
March, both short-term and long-term
market interest rates have risen substantially. On May 4 the Board of Governors
announced an increase in Federal Reserve discount rates from 13 to 14 percent and an increase in the surcharge
from 3 to 4 percentage points on frequent
borrowings of large institutions.
The Federal Open Market Committee
seeks to foster monetary and financial
conditions that will help to reduce inflation, promote economic growth, and
contribute to a sustainable pattern of
international transactions. At its meeting
in early February, the Committee agreed
that these objectives would be furthered
by growth of M-1A, M-1B, M-2, and M-3

FOMC Policy Actions

113

from the fourth quarter of 1980 to the of 8.6 percent. Average prices, as
fourth quarter of 1981 within ranges of 3 measured by the fixed-weight price
to 5Vi percent, V/i to 6 percent, 6 to 9 index for gross domestic business
percent, and 6V2 to 9Vi percent respectively, abstracting from the impact of product, rose less rapidly than in the
introduction of NOW accounts on a na- first quarter.
tionwide basis. The associated range for
The dollar value of retail sales was
bank credit was 6 to 9 percent. These virtually unchanged in May after
ranges will be reconsidered as conditions
having declined appreciably in April.
warrant.
In the short run the Committee seeks Unit sales of new automobiles rebehavior of reserve aggregates consis- mained weak in June; sales in the
tent with a substantial deceleration of second quarter as a whole were
growth in M-1B from April to June to an about one-fifth below the first-quarannual rate of 3 percent or lower, after
allowance for the impact of flows into ter rate.
NOW accounts, and with growth in M-2
The index of industrial production
at an annual rate of about 6 percent. The rose 0.3 percent in May, following
shortfall in growth of M-1B from the
two-month rate specified above would an increase of only 0.1 percent in
be acceptable, in light of the rapid April. A further increase in automogrowth in April and the objective adopt- bile assemblies in May, to an annual
ed by the Committee on March 31 for rate nearly 2 million units above the
growth from March to June at an annual recent pace of sales of domestic
rate of 5Vi percent or somewhat less. It is
recognized that shifts into NOW ac- models, accounted for more than
counts will continue to distort measured half of the increase in the total index.
growth in M-1B to an unpredictable ex- Production of business equipment
tent, and operational reserve paths will and space and defense products conbe developed in the light of evaluation of tinued to expand, while output of
those distortions. The Chairman may
call for Committee consultation if it ap- construction supplies fell.
pears to the Manager for Domestic OperNonfarm payroll employment,
ations that pursuit of the monetary ob- adjusted for changes in the number
jectives and related reserve paths during of workers on strike, continued to
the period before the next meeting is
likely to be associated with a federal advance in April and May but defunds rate persistently outside a range of clined appreciably in June; employ16 to 22 percent.
ment fell substantially further in conVotes for this action: Messrs.
Volcker, Solomon, Boehne, Boykin,
Corrigan, Gramley, Partee, Rice,
Schultz, Mrs. Teeters, Messrs. Wallich, and Winn. Votes against this action: None. (Mr. Winn voted as an
alternate member.)

Meeting Held on July 6-7, 1981
1. Domestic Policy Directive
The information reviewed at this
meeting suggested that real gross
national product changed little in the
second quarter, following expansion
in the first quarter at an annual rate




struction and state and local
government in June, and it also declined in retail trade. In manufacturing, employment was about unchanged, while the average factory
workweek edged down to 40.1
hours. The unemployment rate was
7.3 percent, lower than in May but
unchanged from earlier months of
the year.
The Department of Commerce
survey of business spending plans
taken in May suggested that currentdollar expenditures for plant and
equipment would rise about %Vi percent in 1981, compared with lOVi

114

FOMC Policy Actions

percent reported in the February
survey and an actual expansion of
about 9VA percent in 1980. The latest
survey results implied little growth
in nominal expenditures over the remainder of the year, given the relatively large increase in outlays in the
first quarter.
Private housing starts fell 14 percent in May to an annual rate of 1.15
million units, 25 percent below the
average pace in the fourth quarter of
1980. Combined sales of new and
existing homes in May continued at
about the reduced rate of recent
months.
Producer prices of finished goods
increased 0.6 percent in June, about
the same as the April-May average.
Over the second quarter producer
prices rose at an annual rate of about
7 percent, considerably below the
average rate of 12 percent in the first
quarter. Prices of consumer foods
continued to change little on balance
during the quarter; and energy
prices, which had surged in the first
quarter following decontrol of oil
prices, rose at an annual rate of only
5VA percent. Price increases for other
finished goods on the average were
somewhat higher in the second quarter than in the first. The rise in the
consumer price index slowed in
April to an annual rate of 5 percent;
but it accelerated in May to a rate of
8 percent, reflecting primarily a
sharp rise in the homeownership
component of the index. Over the
two-month period, food prices declined slightly on balance, and the
rate of increase in prices of energy
items slowed substantially. Over the
first six months of 1981, the rise in
the index of average hourly earnings
of private nonfarm production workers was slightly less rapid than it was
during 1980.



In foreign exchange markets the
trade-weighted value of the dollar
against major foreign currencies
continued to rise through May and
early June and then leveled off. On
the average in June, the value of the
dollar was about 25 percent above its
year-earlier level. The U.S. trade
deficit in the April-May period was
somewhat above the average in the
first quarter. The value of exports
was down marginally, but the value
of imports was considerably higher.
At its meeting on May 18, the
Committee had decided that open
market operations in the period until
this meeting should be directed toward behavior of reserve aggregates
associated with growth of M-1B
from April to June at an annual rate
of 3 percent or lower, after allowance for the impact of flows into
NOW accounts, and growth in M-2
at an annual rate of about 6 percent.
A shortfall in growth of M-1B from
the two-month rate of 3 percent
would be acceptable, in light of the
rapid growth in April and the objective adopted by the Committee at its
meeting on March 31 for growth
from March to June at an annual rate
of 5Vi percent or somewhat less. If it
appeared to the Manager for Domestic Operations that pursuit of the
monetary objectives and related reserve paths during the period before
the next meeting was likely to be
associated with a federal funds rate
persistently outside a range of 16 to
22 percent, the Chairman might call
for Committee consultation.
During the intermeeting period,
incoming data indicated a progressive weakening of M-1B. In accordance with the Committee's decision
on May 18, reserves provided
through open market operations
were constrained to accommodate

FOMC Policy Actions
the weakness up to a point, but
subsequently they were more ample.
Reserves borrowed from the discount window remained around $2lA
billion through most of June and
then declined to around $PA billion
toward the end of the intermeeting
period. Federal funds generally traded in a range of 18!/2 to 19V2 percent
throughout the intermeeting period.
However, most other short-term
market interest rates declined 3A to
PA percentage points, on balance.
M-1B, adjusted for the estimated
effects of shifts into NOW accounts,
declined at annual rates of about 5
percent and 10!/2 percent in May and
June respectively, following expansion at an annual rate of close to 17
percent in April. From the fourth
quarter of 1980 to the second quarter
of 1981, shift-adjusted M-1B grew at
an annual rate of about 2lA percent,
below the lower end of the Committee's range for growth in that aggregate for the year ending in the fourth
quarter of 1981. Growth in M-2
slowed to an annual rate of about 43A
percent on average in May and June,
reflecting not only the contraction in
M-1B, but also a moderation in
growth of money market mutual
funds. The recent slowing brought
M-2 to a level in the second quarter
that was only slightly above the upper end of the growth path consistent with its range for the year from
the fourth quarter of 1980 to the
fourth quarter of 1981.
Total credit outstanding at U.S.
commercial banks expanded at an
annual rate of \PA percent in May,
but the rate slowed to about 5 percent in June. Heavy acquisitions of
U.S. government securities characterized both months. Growth in total
loans accelerated in May and then
slowed in June, but business loans



115

picked up in May from the sluggish
pace of earlier months and accelerated further in June. Net issues of
commercial paper by nonfinancial
corporations grew at exceptionally
rapid rates in May and June, following a decline in April.
Yields on most long-term securities trended downward through
much of the intermeeting period but
moved up in the final days to levels
little changed from those at the time
of the May meeting. Over the interval, the prime rate charged by commercial banks on short-term business loans moved in a range of 19^2
to 201/2 percent; at the end of the
period the rate was 20 percent at
most banks. In home mortgage markets, average rates on new commitments for fixed-rate loans at savings
and loan associations remained close
to the level of \&A percent prevailing
since mid-May.
The staff projections presented at
this meeting suggested that growth
in real GNP would probably be sluggish over the second half of 1981 and
into the first half of 1982. That development might well be accompanied
by an upward drift in the unemployment rate but also by some progress
in reducing inflation. The rise in the
fixed-weight price index for gross
domestic business product was projected to change little during the rest
of this year from the reduced pace of
the second quarter and to decline
somewhat further in the first half of
next year.
A substantial number of members
believed that growth in real GNP
would prove to be stronger than projected by the staff, although in some
cases anticipated strength was concentrated in 1982. Other members
thought that economic activity was
likely to be weaker than projected by

116

FOMC Policy Actions

the staff; they anticipated a decline
in real GNP over the balance of 1981
followed by relatively sluggish recovery in 1982. While expecting the
rate of inflation to remain high by
historical standards, nearly all members anticipated some improvement.
A number questioned whether progress thus far represented more than a
temporary respite; and they felt that
significant and sustained progress in
reducing the underlying rate of inflation would take time and might not
be consistent with an early and
strong rebound in economic activity.
Others were more optimistic, suggesting that significant improvement
in the behavior of prices would help
to set the stage for sizable growth in
1982.
A number of members commented
that realization of forecasts of sustained growth in real GNP over the
next year or more, even at a slow
pace, depended upon declines in interest rates. In their opinion, an extended period with interest rates at
or near the high levels currently prevailing would more likely induce
both a decline in economic activity
and a spreading of financial strains.
A few members described monetary
policy, and its objective of restrained growth in monetary aggregates, as a "governor" on the economy that retarded expansion in
economic activity as long as inflation
and inflationary expectations remained high but tended to prevent
any contraction in activity from cumulating. In this framework, a pickup in demands for goods and services while inflation remained high
would lead to rising interest rates
and increasing restraint on expenditures, and any easing in demands for
goods and services would tend to
lower interest rates and lessen re


straint on expenditures. It was also
suggested that long-term interest
rates might be on the verge of easing, in response to the improvement
in the outlook for prices that appeared to be developing, which
would permit stronger expansion in
economic activity next year than
generally projected. On the other
hand, some skepticism was expressed about the chances of emerging from the current environment of
rapid inflation and high interest rates
gradually, and without considerable
stress in the financial structure and
risks for economic activity during
the transition to lower rates of inflation.
At its meeting on February 2-3,
1981, the Committee had adopted
the following ranges for growth of
the monetary aggregates over the
period from the fourth quarter of
1980 to the fourth quarter of 1981:
M-1A and M-1B, 3 to 5Vz percent
and 3Vz to 6 percent respectively,
after adjustment for the estimated
effects of flows into NOW accounts;
M-2, 6 to 9 percent; and M-3, 6V2 to
9!/2 percent. The associated range for
growth of commercial bank credit
was 6 to 9 percent. In establishing
the ranges then, the Committee had
agreed that monetary growth should
slow in 1981 in line with the continuing objective of contributing to a
reduction in the rate of inflation and
providing the basis for restoration of
economic stability and sustainable
growth in output of goods and services.
At this meeting, in accordance
with the Full Employment and Balanced Growth Act of 1978 (the Humphrey-Hawkins Act), the Committee
reviewed its ranges for growth of the
monetary and credit aggregates for
the period from the fourth quarter of

FOMC Policy Actions
1980 to the fourth quarter of 1981
and gave preliminary consideration
to objectives for monetary growth
that might be appropriate for 1982.l
In doing so, the members recognized
the likelihood of continued divergence in the growth of the different
aggregates, partly reflecting institutional change, and the considerable
uncertainty about how such institutional change might affect monetary
growth in the future. As noted earlier, expansion of shift-adjusted M-1B
from the fourth quarter of 1980 to the
second quarter of 1981 was relatively low in relation to the path implied
by the Committee's range for the
year. However, growth of M-2 and
M-3 so far in 1981 has been at or
above the Committee's ranges.
The shortfall in growth of shiftadjusted M-1B in the first half of the
year followed relatively rapid
growth in the latter part of 1980; and
it was accompanied by an unusually
rapid rise in the income velocity of
money, as nominal GNP expanded
strongly. In partial explanation, extraordinarily high interest rates in
combination with the introduction of
NOW accounts on a nationwide basis apparently provided a greater
stimulus to intensive management of
cash balances than that normally associated with an increase in interest
rates. In the period ahead, M-1B
might behave somewhat differently
from earlier measures of transaction
balances, because of the sizable volume of deposits earning interest and
because of the greater weight of
household balances in the total. The
behavior of M-2 was likely to be
affected to some extent by two re1. The Board's midyear report under the
act was transmitted to the Congress on July
20, 1981,



117

cent decisions of the Depository Institutions Deregulation Committee
(DIDC), effective August 1: one removed rate caps on the 2!/2-year
small saver certificate, enabling the
rate to fluctuate with the yield on
2!/2-year Treasury securities at all
levels; and the other eliminated ceilings altogether on small time deposits with initial maturities of four
years or more. The rapid growth of
money market funds appeared to influence the growth of both M-l and
M-2, in opposite directions, but the
magnitude of the effects was difficult
to judge.
In the Committee's discussion of
the longer-run ranges, the members
were in agreement on the need to
maintain a policy of restraint. However, continuation of the increase in
velocity of M-lB at the rate of the
first half seemed unlikely, and thus
the public's demand for narrowly
defined money would probably pick
up in the second half. Moreover, a
significantly more rapid increase in
narrowly defined money would be
necessary to reach the Committee's
objective for the year. At the same
time, it was observed that the present situation provided a critical opportunity to sustain the signs of progress in reducing the rate of
inflation, an opportunity that could
be lost if monetary growth in the
months ahead became too rapid.
Even if rapid monetary expansion
should lower interest rates, which
was debatable, such effects would
likely be temporary, and latent demands for goods and services would
be released at the potential cost of a
still more difficult period of high
interest rates and financial strains
later. The point was made that lasting declines in nominal interest rates
and a solid base for sustained growth

118

FOMC Policy Actions

would depend on convincing progress in reducing inflation.
In light of all the circumstances,
the Committee agreed to retain the
previously established ranges for the
monetary aggregates for 1981. In the
course of the discussion, some sentiment was expressed for a reduction
of Vi percentage point in the range
for M-1B, which would indicate that
the System did not intend to seek
very rapid monetary growth in the
second half of the year. However, a
small adjustment of that sort, though
partly justified by institutional
change, was considered on balance
potentially more confusing than useful. Instead, in light of its desire to
maintain moderate growth in money
over the balance of the year, the
Committee wished to affirm that
growth in M-1B near the lower end
of its range would be acceptable and
desirable. At the same time, the
Committee recognized that growth
in the broader monetary aggregates
might be high in their ranges.

monetary aggregates might be high in
their ranges.
Votes for this action: Messrs.
Volcker, Solomon, Boehne, Boykin,
Corrigan, Gramley, Keehn, Partee,
Rice, Schultz, Mrs. Teeters, and Mr.
Wallich. Votes against this action:

None.
With respect to 1982, the Committee favored some reduction in the
objectives for monetary growth in
keeping with the long-standing goal
of moving gradually toward rates of
monetary expansion consistent with
general price stability. Looking toward completion of the major shift
into NOW accounts, the Committee
decided to establish a range for a
single M-l aggregate having the
same coverage as the present M-1B.
Moreover, on the assumption that
shifts into NOW accounts from nontransaction balances would no longer be significant, calculation of rates
of growth for M-l after adjustment
for such shifts would not be necessary. The Committee also decided to
widen the range for the narrow monThe Committee reaffirmed the ranges etary aggregate to 3 percentage
for growth in the aggregates for the peri- points, from 2V2 points, reflecting
od from the fourth quarter of 1980 to the the greater uncertainty at this time in
fourth quarter of 1981 that it had adopted judging the relationship of this aggreat its meeting in early February 1981.
These ranges, abstracting from the im- gate to economic and financial depact of NOW accounts on a nationwide velopments resulting from the recent
basis, were 3 to 5Vi percent for M-1A, change in its composition; because
V/i to 6 percent for M-IB, 6 to 9 percent of the possibility of some residual
for M-2, and 6V2 to 9V2 percent for M-3.
The associated range for bank credit was shifting into NOW accounts, the up6 to 9 percent. The Committee recog- per end of the range was reduced by
nized that a shortfall in M-1B growth in less than the lower end.
the first half of the year partly reflected a
Thus, the Committee tentatively
shift in public preferences toward other agreed that for the period from the
highly liquid assets and that growth in
the broader aggregates had been running fourth quarter of 1981 to the fourth
somewhat above the upper end of the quarter of 1982 growth of M-l, M-2,
ranges. In light of its desire to maintain and M-3 within ranges of 2V2 to 5Vi
moderate growth in money over the bal- percent, 6 to 9 percent, and 6I/2 to 9!/2
ance of the year, the Committee expect- percent would be appropriate. The
ed that growth in M-1B for the year
would be near the lower end of its range. upper and lower ends of the range
At the same time, growth in the broader for M-l were reduced V2 percentage




FOMC Policy Actions
point and 1 percentage point respectively from the 1981 range for M-1B.
The ranges for the broader aggregates were unchanged from those for
1981. However, given the expectation that growth of these aggregates
in 1981 would be around the upper
end of the ranges and looking toward
results in 1982 more toward the middle of the ranges, the new ranges
were fully consistent with year-toyear reductions in growth.

119

the year. At the same time, however, they wished to avoid generating
an excessively rapid rebound in
growth of M-1B, both because the
pace would need to be sharply reduced later and because such a rebound might tend to raise growth of
M-2 above the upper end of its range
for the year. With respect to the
intermeeting range for the federal
funds rate that provided a mechanism for initiating further consultation of the Committee, proposals
The Committee tentatively agreed that typically were from 15 or 16 percent
for the period from the fourth quarter of
1981 to the fourth quarter of 1982 growth to 21 or 22 percent.
of M-l, M-2, and M-3 within ranges of
Specifically, the members agreed
2 2 to 5Vi percent, 6 to 9 percent, and 6 2to seek behavior of reserve aggreV
V
to 9 2 percent would be appropriate.
V
gates associated with growth of
Votes for this action: Messrs. M-1B from June to September at an
Volcker, Solomon, Boehne, Boykin, annual rate of 7 percent, after allowCorrigan, Gramley, Keehn, Partee,
Rice, Schultz, and Wallich. Vote ance for flows into NOW accounts,
provided that growth of M-2 reagainst this action: Mrs. Teeters.
mained around the upper end of its
range for the year or tended to move
Mrs. Teeters dissented from this
action because she believed that, in down within the range. Given the
light of all the uncertainties in the declines in May and June, growth of
economic situation, it was prema- M-1B at the rate specified for the
ture to adopt objectives calling for period from June to September
reduced monetary growth in 1982. would result in growth at an annual
She preferred to specify the same rate of about 2 percent from the
ranges for 1982 as for 1981, pending average in the second quarter to the
the Committee's reconsideration of average in the third quarter. The
monetary objectives for 1982 at its members recognized that shifts into
NOW accounts would continue to
meeting next February.
In the Committee's discussion of distort measured growth in M-lB to
policy for the short run, the mem- an unpredictable extent and that opbers in general agreed that opera- erational paths would have to be
tions in the period before the next developed in the light of evaluation
meeting should be directed toward of those distortions. The Chairman
growth of monetary aggregates over might call for Committee consultathe third quarter at rates that would tion if it appeared to the Manager for
promote achievement of the mone- Domestic Operations that pursuit of
tary objectives for the year as a the monetary objectives and related
whole. Thus, they wished to foster reserve paths during the period begrowth of M-lB over the third quar- fore the next meeting was likely to
ter at a rate high enough to permit be associated with a federal funds
growth of this monetary aggregate rate persistently outside a range of
toward the lower end of its range for 15 to 21 percent.




120

FOMC Policy Actions

The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real GNP changed little
in the second quarter, following the substantial expansion in the first quarter;
prices on the average rose less rapidly
than in the first quarter. The dollar value
of total retail sales was virtually unchanged in May after having declined
appreciably in April, and sales of new
cars remained weak in June. Industrial
production rose slightly on the average
in April and May, while nonfarm payroll
employment continued to advance, after
adjustment for strikes. In June strikeadjusted nonfarm employment declined
appreciably; the unemployment rate was
7.3 percent, somewhat lower than in
May but unchanged from earlier months
of 1981. In May housing starts declined
sharply. Over the first six months of
1981, the rise in the index of average
hourly earnings was slightly less rapid
than during 1980.
The weighted average value of the
dollar against major foreign currencies
continued to rise through May and early
June and then leveled off. In April-May
the U.S. foreign trade deficit was somewhat above the first-quarter rate.
M-1B, adjusted for the estimated effects of shifts into NOW accounts, declined substantially in May and June
following the sharp expansion in April,
and growth in M-2 slowed. The level of
adjusted M-1B in the second quarter on
the average was below the lower end of
the Committee's range for growth over
the year from the fourth quarter of 1980
to the fourth quarter of 1981; the level of
M-2 in the second quarter was slightly
above the upper end of its range for the
year. Since mid-May, on balance, shortterm market interest rates have declined
somewhat while long-term yields generally have changed little.
The Federal Open Market Committee
seeks to foster monetary and financial
conditions that will help to reduce inflation, promote sustained economic
growth, and contribute to a sustainable
pattern of international transactions. At
its meeting in early February, the Committee agreed that these objectives
would be furthered by growth of M-1A,



M-1B, M-2, and M-3 from the fourth
quarter of 1980 to the fourth quarter of
1981 within ranges of 3 to 5Vi percent,
3Vi to 6 percent, 6 to 9 percent, and 6!/2 to
Wi percent respectively, abstracting
from the impact of introduction of NOW
accounts on a nationwide basis. The
Committee recognized that the shortfall
in M-1B growth in the first half of the
year partly reflected a shift in public
preferences toward other highly liquid
assets and that growth in the broader
aggregates has been running somewhat
above the upper ends of the ranges. The
Committee reaffirmed its ranges for
1981, but in light of its desire to maintain
moderate growth in money over the balance of the year, the Committee expected that growth in M-1B for the year
would be near the lower end of its range.
At the same time, growth in the broader
aggregates may be high in their ranges.
The associated range for bank credit was
6 to 9 percent. The Committee also tentatively agreed that for the period from
the fourth quarter of 1981 to the fourth
quarter of 1982 growth of M-l, M-2, and
M-3 within ranges of 2!/2 to 5Vz percent, 6
to 9 percent, and 6V2 to 9Vi percent
would be appropriate. These ranges will
be reconsidered as warranted to take
account of developing experience with
public preferences for NOW and similar
accounts as well as changing economic
and financial conditions.
In the short run the Committee seeks
behavior of reserve aggregates consistent with growth of M-lB from June to
September at an annual rate of 7 percent
after allowance for the impact of flows
into NOW accounts (resulting in growth
at an annual rate of about 2 percent from
the average in the second quarter to the
average in the third quarter), provided
that growth of M-2 remains around the
upper limit of, or moves within, its range
for the year. It is recognized that shifts
into NOW accounts will continue to distort measured growth in M-1B to an
unpredictable extent, and operational reserve paths will be developed in the light
of evaluation of those distortions. The
Chairman may call for Committee consultation if it appears to the Manager for
Domestic Operations that pursuit of the
monetary objectives and related reserve
paths during the period before the next
meeting is likely to be associated with a

FOMC Policy Actions
federal funds rate persistently outside a
range of 15 to 21 percent.
Votes for this action: Messrs.
Volcker, Solomon, Boehne, Boykin,
Corrigan, Gramley, Keehn, Rice,
Schultz, Mrs. Teeters, and Mr. Wallich. Vote against this action: Mr.
Partee.
Mr. Partee dissented from this action because, in light of the indications of weakening in economic activity, he preferred to give more
emphasis to reducing the risk of a
cumulative shortfall in growth of
M-1B. Accordingly, he favored
specification of a somewhat higher
objective for growth of M-1B over
the period from June to September,
and without the additional weight assigned to the potential for more rapid
growth of M-2. In his view, the
short-run behavior of M-2 was subject to great uncertainty because of
both the volatile influence of money
market mutual funds and the recent
DIDC actions authorizing certain deposit instruments to be offered at
competitive interest rates beginning
August 1.
2. Authorization for Domestic
Open Market Operations
On August 6, 1981, the Committee
voted to increase from $3 billion to
$4V2 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 August 18,
1981.
Votes for this action: Messrs.
Volcker, Solomon, Boykin, Corrigan,
Gramley, Keehn, Rice, Schultz, Mrs.




121

Teeters, Messrs. Winn, and Black.
Votes against this action: None. Absent: Messrs. Boehne and Partee.
(Mr. Black voted as alternate for Mr.
Boehne.)
This action was taken on the recommendation of the Manager for
Domestic Operations. The Manager
had advised that since the July meeting, substantial net purchases of securities had been undertaken to
counter the effects on member bank
reserves of the transfer of funds associated with settlement of Iranian
accounts and also the effects of levels of float that were lower than
normal. The leeway for further purchases had been reduced to about
$200 million, and additional purchases in excess of that amount
might be required over the rest of the
intermeeting interval.
Meeting Held on August 18, 198!
Domestic Policy Directive
The information reviewed at this
meeting suggested that real GNP
was likely to change little in the
current quarter, following a decline
at an annual rate of about 2 percent
in the second quarter indicated by
preliminary estimates of the Commerce Department. Average prices,
as measured by the fixed-weight
price index for gross domestic business product, appeared to be continuing to rise less rapidly than earlier in the year.
The dollar value of total retail
sales increased appreciably in June
and July following sizable declines
over the previous two months. Sales
gains at dealers in automotive products accounted for about half of the
overall increase in June and nearly
all of the rise in July. Unit sales of
new automobiles picked up some-

122

FOMC Policy Actions

what in July from an extremely low
pace in the second quarter.
The index of industrial production
rose 0.3 percent in July following a
slight decline in June. Most of the
July increase reflected a continuation of the post-strike rebound in
coal output; production of automobiles and trucks fell sharply, and
output of construction supplies continued to decline. Capacity utilization in manufacturing edged down to
79.6 percent in July following a more
sizable decline in June.
Nonfarm payroll employment,
adjusted for changes in the number
of workers on strike, advanced substantially in July after having declined appreciably in June. Employment gains were widespread, and
were relatively strong in manufacturing and in retail trade; employment in construction, however, fell
further. The unemployment rate declined to 7.0 percent, somewhat below the average rate of 7.4 percent
for the first half of the year.
Private housing starts fell substantially further in June, to an annual
rate of just over 1 million units;
newly issued permits for residential
construction also declined sharply.
Combined sales of new and existing
homes continued at about the reduced pace of recent months.
The rise in producer prices of finished goods moderated to an annual
rate of about 5lA percent in July, a
little less than the average in the
second quarter and sharply below
the rate of 1314 percent in the first
quarter. Energy prices declined in
July, while prices of finished foods
rose sharply. In June, the consumer
price index increased at an annual
rate of about 8!/2 percent. As in May,
the increase reflected a substantial
rise in the homeownership compo


nent of the index; retail food prices
were about unchanged and though
energy prices continued to increase,
the pace was much slower than earlier in the year. Over the second quarter as a whole, consumer prices rose
at an annual rate of about 7J/2 percent, compared with a rate of 91/2
percent in the first quarter. Over the
first seven months of the year, the
rise in the index of average hourly
earnings was somewhat less rapid
than it was during 1980.
In foreign exchange markets the
trade-weighted value of the dollar
against major foreign currencies had
risen about 5 percent further between early July and early August,
when it reached its highest level in
nearly a decade. More recently, the
dollar had declined, but it was up
about 2 percent on balance over the
intermeeting period. In June, the
U.S. trade deficit declined slightly
from the May level. For the second
quarter the deficit was up substantially over the first-quarter rate, as
the value of imports increased and
the value of exports declined somewhat, reflecting a large drop in agricultural exports.
At its meeting on July 6-7, the
Committee had decided that open
market operations in the period until
this meeting should be directed toward behavior of reserve aggregates
associated with growth of M-1B
from June to September at an annual
rate of 7 percent after allowance for
flows into NOW accounts (resulting
in growth at an annual rate of about 2
percent from the average in the second quarter to the average in the
third quarter), provided that growth
of M-2 remained around the upper
end of its range for the year or
tended to move down within the
range. If it appeared to the Manager

FOMC Policy Actions
for Domestic Operations that pursuit
of the monetary objectives and related reserve paths during the period
before the next meeting was likely to
be associated with a federal funds
rate persistently outside a range of
15 to 21 percent, the Chairman might
call for a Committee consultation.
Data becoming available after the
first week or so of the intermeeting
period indicated some shortfall in
growth of M-1B from the short-term
path implied by the objective specified by the Committee. Growth of
M-2 appeared to be about in line
with the Committee's objective.
Consequently, required reserves and
the demand for reserves contracted
in relation to the supply being made
available through open market operations, and member bank borrowings declined from an average of
about $P/4 billion around the time of
the July meeting to an average of
about $1.2 billion in the first two
statement weeks in August. The federal funds rate averaged about 19
percent during July and declined to
an average of about IS1A percent
during the first half of August. Despite the decline in the federal funds
rate, yields on most other short-term
instruments rose about 1 to 1 Vi percentage points over the intermeeting
period.
M-1B, adjusted for the estimated
effects of shifts into NOW accounts,
expanded at an annual rate of about
V/i percent in July, following contraction at annual rates averaging
nearly 7 percent in May and June.
Growth in M-2, buoyed by rapid
expansion in money market mutual
fund shares, accelerated to an annual rate of 8 percent from an annual
rate of about 4 percent on average in
the previous two months. In July,
the level of shift-adjusted M-1B was



123

well below the lower end of the
Committee's range for growth over
the year from the fourth quarter of
1980 to the fourth quarter of 1981,
while the level of M-2 was slightly
below the upper end of its range for
the year. Data available for early
August suggested substantial strength
in both M-1B and M-2. The strength
in M-2 apparently reflected in part
responses of the public to the availability of more attractive yields on
small saver certificates with maturities of 2Vi years or more, whose
interest rate ceilings were liberalized, effective August 1.
Total credit outstanding at U.S.
commercial banks expanded at an
annual rate of 53/4 percent in July,
about the same as in June. With the
exception of business loans, which
accelerated somewhat further from a
brisk pace in June, growth in the
major components of bank credit
was sluggish. Net issues of commercial paper by nonfinancial corporations expanded at a moderate pace in
July, following growth at exceptionally rapid rates in the preceding two
months.
Yields on most intermediate- and
long-term securities moved up Vi to
1 Vi percentage points over the intermeeting interval to record levels.
The upward pressure on interest
rates apparently reflected increasing
concern about current and prospective financing needs of the Treasury
in the light of enactment of legislation to reduce taxes, incoming data
on the economy that were stronger
than many market participants had
anticipated, and some disappointment that easing of market pressures
had not developed as rapidly as
many had expected. The prime rate
charged by commercial banks on
short-term business loans was raised

124

FOMC Policy Actions

!/2 percentage point over the intermeeting period to 20!/2 percent. In
home mortgage markets, average
rates on new commitments for fixedrate loans at savings and loan associations rose to 17!/4 percent from 163A
percent at the time of the July meeting.
The staff projections presented at
this meeting suggested that growth
in real GNP probably would be sluggish over the remainder of 1981 and
during the first half of 1982. Such a
development was likely to be accompanied by a moderate increase in the
unemployment rate from its current
level. The rise in the fixed-weight
price index for gross domestic business product was projected to
change little during the rest of this
year from the reduced pace of the
second quarter but to decline somewhat further in the first half of 1982.
In the Committee's discussion of
the economic situation and outlook,
the view was expressed that overall
economic activity was holding up
fairly well despite reports of depressed conditions in some areas of
the country and in some credit-dependent sectors of the economy.
Real GNP had declined somewhat in
the second quarter, but the latest
indicators of economic activity did
not suggest that a cumulative decline
was under way. A number of members emphasized the improvement in
key measures of inflation, including
some signs of moderation in wage
increases, and suggested that inflationary expectations might be abating. Other members felt, however,
that it was premature to conclude
that inflationary attitudes and behavior had been fundamentally altered.
In this connection it was observed
that restraint on some prices reflected the intense pressures that had



built up in financial markets and that
a near-term relaxation of those financial pressures might quickly dissipate the sense of progress against
inflation.
Several members indicated their
broad agreement with the staff projection of little change in economic
activity over the months immediately ahead, but one member commented that some decline was a more
likely prospect. The longer-run economic outlook was more clouded
and subject to diverging influences.
Some members were concerned that
if abnormally high interest rates
should persist for an extended period, the already strong pressures on
many interest-sensitive sectors of
the economy would intensify and the
resulting financial strains could induce dislocations and a sharp decline in overall economic activity.
Other members noted that the economy had displayed remarkable resiliency and adaptability to high interest rates and they emphasized that
fiscal policy would exert an increasingly stimulative impact on the economy as time went on. It was also
suggested that further moderation in
inflation would have a favorable effect on economic activity over time,
in large part by relieving pressures
on financial markets, although the
near-term impact could be some reduction in consumer spending that
would otherwise have been made in
anticipation of later price increases.
At its meeting on July 6-7, 1981,
the Committee reaffirmed the monetary growth ranges for the period
from the fourth quarter of 1980 to the
fourth quarter of 1981 that it had set
at its meeting in early February.
These ranges were 3 to 5V2 percent
for M-1A and 3l/i to 6 percent for
M-1B, abstracting from the impact of

FOMC Policy Actions
NOW accounts on a nationwide basis, 6 to 9 percent for M-2, and 6!/2 to
9V2 percent for M-3. The associated
range for bank credit was 6 to 9
percent. The Committee recognized
that a shortfall in M-1B growth in the
first half of the year partly reflected
a shift in public preferences toward
other highly liquid assets and that
growth in the broader aggregates had
been running somewhat above the
upper end of the ranges. In light of
its desire to maintain moderate
growth in money over the balance of
the year, the Committee expected
that growth in M-1B for the year
would be near the lower end of its
range. At the same time, growth in
the broader monetary aggregates
might be at the higher end of their
ranges.
In the Committee's discussion of
policy for the weeks immediately
ahead, a consensus emerged in favor
of retaining the monetary growth objectives for the third quarter that had
been adopted at the July meeting.
There was also agreement to retain
the 15 to 21 percent intermeeting
range for the federal funds rate that
provided a mechanism for initiating
further consultation by the Committee. During July, growth in M-1B,
adjusted for the estimated effects of
flows into NOW accounts, had fallen
considerably short of the 7 percent
annual rate objective established for
the June to September period, and
achievement of that objective therefore implied some acceleration of
M-1B during August and September.
Available data for the first part of
August suggested a pickup in M-1B
growth, although interpretation was
complicated by the transitory influence of demand balances accumulated in conjunction with corporate
mergers. At the same time, growth




125

in M-2, which was already close to
the top of its range, also turned up in
early August. A staff analysis suggested that the nontransaction components of M-2 were likely to continue to expand rather rapidly over the
period ahead, partly because of liberalized deposit rate ceilings on
small saver certificates.
In the course of the discussion,
the members considered at some
length the possible implications for
the economy, for policy, and for
reserve provision of the divergent
trends in M-1B and M-2, together
with the other aggregates. It was
emphasized that in addition to the
previously recognized distortions in
measured growth of M-1B resulting
from shifts into NOW accounts and
the development of money substitutes, recent legislative and regulatory developments were likely to
affect growth in the aggregates,
especially M-2, over the near term.
Among the uncertainties in question
were the further impact on M-2 of
the liberalization of interest rate ceilings on small saver certificates, the
continuing attractiveness of money
market mutual funds, and the extent
to which payments to stockholders
as a result of recent merger activities
were being invested in nontransaction-type accounts included in M-2.
Even more difficult to assess was the
impact of the introduction of taxexempt "all saver" certificates on
October 1, 1981; those certificates
could well contribute to a marked
acceleration in M-2 growth during
the fourth quarter, but in the interim
measured M-2 might be artificially
lowered to the extent that funds earmarked for investment in these new
instruments were being temporarily
accumulated in repurchase agreements with October 1 maturities.

126

FOMC Policy Actions

Given the uncertainties that were
involved, the members agreed that
widely divergent behavior of the aggregates might pose difficult questions about policy implementation
and reserve provision over the coming period. A view was also expressed that the increasing difficulty
of interpreting the performance of
the monetary aggregates argued for
giving weight to interest rates in
evaluating the degree of restraint being exerted by monetary policy. This
view was based on the premise that
interest rates were already exerting a
great deal of restraint and a small
decline would be welcomed, provided it was not inconsistent with
achievement of the Committee's
longer-term objectives for monetary
growth. In contrast, the danger was
emphasized that a change in approach that attempted to stabilize
interest rates or to encourage a nearterm decline could well be counterproductive if such an effort were
accompanied by or fostered an excessive rebound in monetary
growth; the net result could then be
to encourage inflationary expectations, call into question the commitment of the Federal Reserve to an
anti-inflationary policy, and thereby
actually jeopardize the prospects for
ultimately achieving and sustaining
the significantly lower interest rates
that were sought.
Several members expressed concern about placing too much reliance
on M-2 as a guide to policy over the
weeks ahead in light of the various
factors that were potential sources
of distortion. In this view the provision of reserves should not be restrained solely on the basis of M-2
growth in excess of the Committee's
objective. In the discussion, it was
understood that the sizable growth



in M-2 in prospect for August would
not in itself call for further restraint
in the provision of reserves, since
such growth would, in any event,
leave M-2 around the upper end of
its range for the year as provided in
the directive. Should measured
growth subsequently appear excessive in the light of the target, careful
assessment would be required of the
possibility that special factors, including regulatory and institutional
changes, were distorting the data. If
necessary, the Chairman might call
for Committee consultation to evaluate the implications for policy.
At the conclusion of the discussion, the Committee agreed to reaffirm the short-run policy objectives
for the third quarter adopted at its
previous meeting.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests little change in real GNP in
the current quarter, following a small
decline in the second quarter; prices on
the average appeared to be continuing to
rise less rapidly than earlier in the year.
The dollar value of total retail sales increased appreciably further in July, reflecting some recovery in sales at automotive dealers. Industrial production
rose slightly in July, while nonfarm payroll employment advanced substantially;
the unemployment rate declined to 7.0
percent, somewhat below its average
level in earlier months of 1981. In June
housing starts declined sharply further.
Over the first seven months of the year,
the rise in the index of average hourly
earnings was somewhat less rapid than
during 1980.
The weighted average value of the
dollar rose further against major foreign
currencies in July and early August, registering gains against all major currencies. In June the U.S. foreign trade deficit declined slightly from the May level,
but for the second quarter the deficit was
up substantially over the first-quarter
rate.

FOMC Policy Actions
In July M-1B, adjusted for the estimated effects of shifts into NOW accounts,
expanded somewhat following a substantial decline in May and June, and growth
in M-2 accelerated from a relatively sluggish pace in the previous two months.
The level of adjusted M-1B in July was
well below the lower end of the Committee's range for growth over the year from
the fourth quarter of 1980 to the fourth
quarter of 1981 while the level of M-2
was slightly below the upper end of its
range for the year. Available data for
early August suggested further acceleration in growth of M-1B and M-2, with
acceleration in M-2 apparently influenced in part by initial responses of the
public to the availability of more attractive deposit instruments, pointing up the
necessity of evaluating the behavior of
M-2 in the light of the impact of regulatory and legislative changes. Since early
July most market interest rates have
risen considerably on balance.
The Federal Open Market Committee
seeks to foster monetary and financial
conditions that will help to reduce inflation, promote sustained economic
growth, and contribute to a sustainable
pattern of international transactions. At
its meeting in early July, the Committee
agreed that these objectives would be
furthered by reaffirming the monetary
growth ranges for the period from the
fourth quarter of 1980 to the fourth quarter of 1981 that it had set at the February
meeting. These ranges included growth
of 3x/2 to 6 percent for M-1B, abstracting
from the impact of flows into NOW
accounts on a nationwide basis, and
growth of 6 to 9 percent and 6/2 to 9Vi
percent for M-2 and M-3, respectively.
The Committee recognized that the
shortfall in M-1B growth in the first half
of the year partly reflected a shift in
public preferences toward other highly
liquid assets and that growth in the
broader aggregates had been running at
about or somewhat above the upper ends
of their ranges. In light of its desire to
maintain moderate growth in money
over the balance of the year, the Committee expected that growth in M-1B for
the year would be near the lower end of
its range. At the same time, growth in the
broader aggregates might be high in their
ranges. The associated range for bank
credit was 6 to 9 percent. The Committee



127

also tentatively agreed that for the period
from the fourth quarter of 1981 to the
fourth quarter of 1982 growth of M-l,
M-2, and M-3 within ranges of 2!/2 to 5Vi
percent, 6 to 9 percent, and 6^2 to 9Vi
percent would be appropriate. These
ranges will be reconsidered as warranted
to take account of developing experience
with public preferences for NOW and
similar accounts as well as changing economic and financial conditions.
In the short run the Committee continues to seek behavior of reserve aggregates consistent with growth of M-1B
from June to September at an annual rate
of 7 percent after allowance for the impact offlowsinto NOW accounts (resulting in growth at an annual rate of about 2
percent from the average in the second
quarter to the average in the third quarter), provided that growth of M-2 remains around the upper limit of, or
moves within, its range for the year. It is
recognized that shifts into NOW accounts will continue to distort measured
growth in M-lB to an unpredictable extent, and operational reserve paths will
be developed in the light of evaluation of
those distortions. The Chairman may
call for Committee consultation if it appears to the Manager for Domestic Operations that pursuit of the monetary objectives and related reserve paths during
the period before the next meeting is
likely to be associated with a federal
funds rate persistently outside a range of
15 to 21 percent.
Votes for this action: Messrs.
Volcker, Solomon, Boykin, Corrigan,
Gramley, Keehn, Rice, Schultz, Mrs.
Teeters, Messrs. Wallich, and Black.
Vote against this action: Mr. Partee.
(Mr. Black voted as alternate for Mr.
Boehne.)
Mr. Partee dissented from this action because, as at the previous

meeting, he preferred to give more
emphasis to reducing the risk of a
cumulative decline in growth of
M-1B in light of the indications of
weakening in economic activity. Accordingly, he favored specification
of a somewhat higher objective for
growth of M-lB over the period from

128

FOMC Policy Actions

June to September, and without the
additional weight assigned to the potential for more rapid growth of M-2.
In his view, the short-run behavior
of M-2 was subject to great uncertainty because of the volatile influence of money market mutual funds,
the liberalization of deposit rate ceilings on small saver certificates beginning August 1, and the introduction of tax-exempt "all saver"
certificates beginning October 1.
Meeting Held on
October 5-6, 1981
Domestic Policy Directive
The information reviewed at this
meeting suggested that real GNP declined slightly further in the third
quarter, following a decline at an
annual rate of about 1 Vi percent in
the second quarter indicated by revised estimates of the Commerce
Department. Average prices, as
measured by the fixed-weight price
index for gross domestic business
product, were estimated to have
continued rising at the somewhat
lower rate that emerged in the second quarter.
In July and August the nominal
value of total retail sales was essentially unchanged from the level in
June. Substantial credit and price
concessions offered during August
and early September temporarily
boosted unit sales of new domestic
automobiles. Sales dropped off in
the latter part of September, however, and for the month as a whole
were down considerably from August. Growth in consumer spending
on goods other than autos had remained sluggish in August; the nominal value of nonauto retail sales in
August was only slightly above its
March level.



The index of industrial production
fell 0.4 percent in August. Most of
the decline reflected a sharp reduction in output of consumer durable
goods, particularly in the motor vehicle industry. Production of business equipment and space and defense products continued to expand,
while output of home goods, construction supplies, and materials fell.
Incoming information for September, including reports of declines in
output in steel, electricity, and coal,
and data on hours and employment,
suggested a further appreciable decline in industrial production. Capacity utilization in manufacturing
declined 0.6 percentage point in August to 79.2 percent, its lowest level
since October 1980 and 8 percentage
points below its recent peak in early
1979.
Total nonagricultural employment
changed little in August and September, according to the establishment
data. In manufacturing, employment
changes in the two months were
small and offsetting, and the average
factory workweek dropped 0.9 hour
in September, although the decline
was apparently overstated because
the survey week included Labor
Day. Over the August-September
period, employment in service industries continued to expand, while
employment by state and local governments declined appreciably. In
contrast to the establishment data,
the survey of households showed a
substantial decline in employment in
September, and the unemployment
rate rose to 7.5 percent, about equal
to its average in the first half of 1981.
The Department of Commerce
survey of business spending plans
taken in late July and August suggested that current-dollar expenditures for plant and equipment would

FOMC Policy Actions

129

be 8.8 percent greater in 1981 than in through mid-September from its
1980, compared with the 8.4 percent peak in early August and on balance
indicated by the survey taken in late had changed little after that. The
April and May. The latest survey depreciation through mid-September
implied little, if any, change in real was associated with a decline in
expenditures for the year.
U.S. short-term interest rates and
Private housing starts fell in Au- with market sentiment that the U.S.
gust to an annual rate below 1 mil- current account might move more
lion units, down from the already sharply into deficit than had been
depressed rate of just over a million thought earlier. In August the U.S.
units in June and July. Starts of foreign trade deficit rose substantialsingle-family homes, at an annual ly from the low rate in July; for July
rate of less than 600,000 units in and August combined, the rate was
August, were down two-fifths from considerably higher than that in the
their level of a year earlier. Newly second quarter, as the value of nonissued permits for residential con- petroleum imports increased and the
struction also declined, and sales of value of exports, agricultural and
new and existing homes dropped nonagricultural, declined markedly.
considerably. Outlays for residential
At its meeting on August 18, the
construction had declined sharply in Committee had decided to reaffirm
real terms over the spring and sum- the policy objectives for the third
mer months, but expenditures for quarter that had been adopted at its
nonresidential construction had meeting on July 6-7. Specifically,
changed little on balance during that the Committee agreed that open
period.
market operations in the period until
The producer price index for fin- this meeting should be directed toished goods rose 0.3 percent in Au- ward behavior of reserve aggregates
gust, compared with 0.4 percent in associated with growth of M-1B
July. The rate of increase in the two from June to September at an annual
months was moderately lower than rate of 7 percent after allowance for
the rate during the second quarter flows into NOW accounts (resulting
and sharply lower than that during in growth at an annual rate of about 2
the first quarter. The consumer price percent from the average in the secindex rose considerably more in July ond quarter to the average in the
and August than in the immediately third quarter), provided that growth
preceding months. Much of the ac- of M-2 remained around the upper
celeration reflected a substantial rise end of, or moved within, its range
in the homeownership component of for the year. If it appeared to the
the index; food prices rose consider- Manager for Domestic Operations
ably, but energy costs increased lit- that pursuit of the monetary objectle. Over the first nine months of the tives and related reserve paths duryear, the rise in the index of average ing the period before this meeting
hourly earnings was somewhat less was likely to be associated with a
federal funds rate persistently outrapid than it was during 1980.
In foreign exchange markets the side a range of 15 to 21 percent, the
trade-weighted value of the dollar Chairman might call for a Committee
against major foreign currencies had consultation.
Shortly after the meeting on Audeclined by nearly 10 percent



130

FOMC Policy Actions

gust 18, data becoming available indicated some shortfall in growth of
M-1B from the path consistent with
the Committee's objective for
growth over the three months from
June to September; and later in the
intermeeting period, the shortfall
widened. However, growth of M-2
remained relatively strong, especially after allowance for shifts from
time accounts into retail repurchase
agreements (not included in M-2) in
anticipation of the October 1 introduction of all savers certificates. Reflecting the shortfall in growth of
M-1B, required reserves and the
demand for reserves contracted in
relation to the supply being made
available through open market operations. Consequently, borrowings
from Federal Reserve Banks for purposes of adjusting reserve positions
declined considerably from late August to late September. The federal
funds rate fell from around I8V4 percent in mid-August to 15 percent in
the statement week ending September 30. The funds rate moved back
up to about I6V2 percent in the days
just before this meeting, apparently
reflecting cautious bank reserve
management associated with the introduction of same-day settlement
for most international transactions
cleared through New York.
M-1B, adjusted for the estimated
effects of shifts into NOW accounts,
increased at an annual rate of about
VA percent over the period from
June to September, while M-2 grew
at an annual rate of about 9 percent.
In September the level of shiftadjusted M-1B was well below the
lower end of the Committee's range
for growth over the year from the
fourth quarter of 1980 to the fourth
quarter of 1981, while the level of
M-2 was at the upper end of its range



for the year. Growth of M-2 during
the third quarter was reduced, perhaps by 1 or 2 percentage points at
an annual rate, by the diversion of
M-2-type assets into retail repurchase agreements issued by depository institutions in anticipation of
the scheduled introduction of all savers certificates on October 1.
Total credit outstanding at U.S.
commercial banks grew at an annual
rate of about lOVi percent in August,
following expansion at annual rates
of about 53/4 percent in June and
July. Growth in business loans
picked up somewhat further from
the brisk pace in June and July,
while security loans contracted
sharply. Bank holdings of Treasury
securities declined in August, but
acquisitions of other securities increased appreciably. Net issues of
commercial paper by nonfinancial
corporations expanded at an exceptionally rapid pace, following moderate growth in July.
In frequently volatile markets,
short-term interest rates declined on
balance over the intermeeting period, while long-term rates rose further. At the time of this meeting,
most short-term rates were down
about 1 to 3 percentage points and
long-term rates were up about Vi to 1
percentage point from their levels in
mid-August. The rise in long-term
rates apparently reflected concerns
of market participants about the prospective size of federal deficits. During the intermeeting interval, the
prime rate charged by commercial
banks on short-term business loans
was reduced by V/i percentage
points to 19 percent. On September
21, in view of the decline in shortterm market rates, the Board of
Governors announced a reduction,
from 4 to 3 percentage points, in the

FOMC Policy Actions
surcharge on frequent borrowings of
large depository institutions at the
discount window. In home mortgage
markets, average rates on new commitments for fixed-rate level-payment conventional loans at sampled
savings and loan associations rose to
18!/4 percent from 17 lA percent at the
time of the August meeting.
The staff projections presented at
this meeting suggested that real GNP
was likely to decline further in the
current quarter and that activity
would remain sluggish over the first
part of 1982. The rise in the fixedweight price index for gross domestic business product was projected
to moderate somewhat further over
the year ahead.
In the Committee's discussion of
the economic situation and outlook,
the consensus was that real GNP
was drifting downward more or less
as portrayed by the staff projections.
The members generally agreed that
the evidence currently available did
not portend a sharp cumulative contraction in activity in coming
months, but a few nevertheless commented on the risks of a more significant decline. A number of members
observed that businesses, especially
the smaller ones, were exposed to
growing financial strains because of
the sluggishness of their sales, the
high level of interest rates, and a
tendency among their customers to
defer payments of bills.
With respect to prospects for
prices, the members in general accepted the staff projection of a further moderation of the rise over the
next few quarters. The view was
expressed that in the current environment, both business and labor
were being subjected to pressures to
restrain or to reduce costs for the
sake of maintaining sales and, in



131

some cases, avoiding plant closings.
At its meeting on July 6-7, 1981,
the Committee reaffirmed the monetary growth ranges for the period
from the fourth quarter of 1980 to the
fourth quarter of 1981 that it had set
at its meeting in early February.
These ranges were 3 to 5!/2 percent
for M-1A and 3l/i to 6 percent for
M-1B, abstracting from the impact
of NOW accounts on a nationwide
basis; 6 to 9 percent for M-2; and 6V2
to W2 percent for M-3. The associated range for bank credit was 6 to 9
percent. The Committee recognized
that a shortfall in M-1B growth in the
first half of the year partly reflected
a shift in public preferences toward
other highly liquid assets and that
growth in the broader aggregates had
been running somewhat above the
upper end of the ranges. In light of
its desire to maintain moderate
growth in money over the balance of
the year, the Committee expected
that growth in M-1B for the year
would be near the lower end of its
range. At the same time, growth in
the broader monetary aggregates
might be at the higher end of their
ranges. For the period from the
fourth quarter of 1981 to the fourth
quarter of 1982, the Committee tentatively agreed that growth of M-l,
M-2, and M-3 within ranges of 216 to
5!/2 percent, 6 to 9 percent, and 6!/2 to
91/2 percent respectively would be
appropriate.
The Committee considered policy
for the period immediately ahead
against the background of a widening divergence between the behavior
of M-1B and the more broadly defined monetary aggregates. M-1B
(shift-adjusted) had expanded little
from June to September, and its annual rate of growth from the average
in the fourth quarter of 1981 to the

132

FOMC Policy Actions

estimated level in September was
about 1 percent, compared with the
Committee's range of V/i to 6 percent for growth over the year from
the fourth quarter of 1980 to the
fourth quarter of 1981. From June to
September, meanwhile, M-2 had
continued to grow at a rate consistent with the upper end of its range
of 6 to 9 percent for the year, and
M-3 had grown at a rate somewhat
above its range.
In interpreting recent experience
and contemplating policy for the period immediately ahead, the Committee continued to face uncertainties with respect to the behavior of
the monetary aggregates. Among
these was an apparent decline in the
public's desire to hold transaction
balances in the forms included in
M-1B. Given income and interest
rates, the increase in M-1B so far
this year had been considerably
smaller than would have been predicted from historical relationships
embodied in conventional money demand equations. It also seemed
clear, however, that the slow growth
in M-1B recently had resulted in part
from the weakening in economic activity. With respect to M-2, the uncertainties included the impact of the
liberalization of interest rate ceilings
on small savers certificates, the
growth of money market mutual
funds, and the introduction of the all
savers (tax-exempt) certificate on
October 1, 1981. Reflecting various
structural changes, assets that bear
either a market interest rate or are
subject to variable ceilings closely
related to market rates had become a
much larger share of the nontransaction component of M-2 than they
were just a year or two ago.
Committee members agreed on
the desirability of continuing to seek



more rapid growth in M-1B over the
remaining three months of 1981,
while taking account of the relative
strength of the broader aggregates.
The observation was made that a
pickup in growth of M-1B now
would reduce the risks of a cumulative contraction in activity, which
could well be followed by an excessively rapid recovery and expansion.
At the same time, many members
expressed the view that very rapid
growth of M-1B over the few remaining months of the year would
contribute to instability and would
interfere with achievement of longer-term economic goals. Specifically, such growth most likely would
dissipate the gains already made in
moderating inflation, exacerbate inflationary expectations, and induce a
rebound in interest rates after no
more than a temporary decline.
Moreover, rapid growth in M-1B
would significantly increase the risk
that the broader monetary aggregates would exceed their ranges for
growth over the year by sizable margins, which was a source of concern
in light of the uncertainties about the
interpretation of the various monetary aggregates in the current circumstances.
In weighing the risks of inadequate monetary growth versus excessive growth over the last three
months of 1981, Committee members took account of the need to
reduce the chances of large destabilizing swings in both monetary
growth and interest rates, while at
the same time achieving the targets
for money growth tentatively established for 1982. Agreement was
reached to seek behavior of reserve
aggregates associated with growth of
M-1B from September to December
at an annual rate of 7 percent, after

FOMC Policy Actions

13 3

The weighted average value of the
dollar against major foreign currencies
declined sharply through mid-September
from its peak in early August and on
balance has changed little since then. In
August the U.S. foreign trade deficit
widened substantially from the low rate
in July; for July and August combined,
the deficit was considerably larger than
the second-quarter rate.
M-1B, adjusted for the estimated effects of shifts into NOW accounts, increased little over the period from June
to September, while M-2 grew at a relatively strong pace. The level of adjusted
M-1B in September was well below the
lower end of the Committee's range for
growth over the year from the fourth
quarter of 1980 to the fourth quarter of
1981; the level of M-2 was at the upper
end of its range for the year. In frequently volatile markets, short-term interest
rates have declined on balance since
mid-August while long-term rates have
risen considerably further. On September 21 the Board of Governors announced a reduction in the surcharge
from 4 to 3 percentage points on frequent
borrowings of large depository institutions.
The Federal Open Market Committee
seeks to foster monetary and financial
conditions that will help to reduce inflation, promote sustained economic
growth, and contribute to a sustainable
pattern of international transactions. At
The information reviewed at this meet- its meeting in early July, the Committee
ing suggests that real GNP declined agreed that these objectives would be
slightly further in the third quarter and furthered by reaffirming the monetary
that prices on the average continued to growth ranges for the period from the
rise at the somewhat lower rate that fourth quarter of 1980 to the fourth quaremerged in the second quarter. In July ter of 1981 that it had set at the February
and August the nominal value of total meeting. These ranges included growth
retail sales was essentially unchanged of 3'/2 to 6 percent for M-1B, abstracting
from the June level, and unit sales of from the impact of flows into NOW
domestic automobiles weakened in Sep- accounts on a nationwide basis, and
tember. Industrial production declined growth of 6 to 9 percent and 6V2 to 9Vi
slightly in August and apparently slack- percent for M-2 and M-3, respectively.
ened further in September, while non- The Committee recognized that the
farm payroll employment changed little shortfall in M-1B growth in the first half
in both months. The unemployment rate of the year partly reflected a shift in
rose to 7.5 percent in September, about public preferences toward other highly
equal to its average in the first half of liquid assets and that growth in the
1981. Housing starts fell in August to the broader aggregates had been running at
lowest rate in several years. Over the about or somewhat above the upper ends
first nine months of the year, the rise in of their ranges. In light of its desire to
the index of average hourly earnings was maintain moderate growth in money
somewhat less rapid than during 1980.
over the balance of the year, the Com-

allowance for the impact of flows
into NOW accounts, and growth of
M-2 at an annual rate of 10 percent
or slightly higher; in specifying the
rate for M-2, the Committee recognized that the behavior of that aggregate would be affected by the recent
regulatory and legislative changes,
particularly the public's response to
the availability of the all savers certificate. In developing related reserve paths, approximately equal
weight would be given to the movements of M-1B and M-2. It was
understood that if these objectives
were realized, growth of M-1B from
the fourth quarter of 1980 to the
fourth quarter of 1981 would remain
below the Committee's range for the
year, while growth of M-2 would
equal or slightly exceed the upper
end of its range. The intermeeting
range for the federal funds rate that
provided a mechanism for initiating
further consultation of the Committee was set at 12 to 17 percent.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:




134

FOMC Policy Actions

mittee expected that growth in M-1B for in the public's desire to hold transacthe year would be near the lower end of tion balances of the types included in
its range. At the same time, growth in the
broader aggregates might be high in their M-1B and to the growth of other
ranges. The associated range for bank asset forms, especially money marcredit was 6 to 9 percent. The Committee ket mutual funds, that to some exalso tentatively agreed that for the period tent serve as transaction balances.
from the fourth quarter of 1981 to the He was also concerned that the pubfourth quarter of 1982 growth of M-l,
M-2, and M-3 within ranges of 2!/2 to 5!/2 lic might perceive fairly rapid monepercent, 6 to 9 percent, and 6V2 to 9Vi tary growth over the balance of the
percent would be appropriate. These year as a relaxation of the System's
ranges will be reconsidered as warranted policy of restraint, especially if such
to take account of developing experience
with public preferences for NOW and growth were to be accompanied by
similar accounts as well as changing eco- sizable decreases in interest rates.
nomic and financial conditions.
In the short run the Committee seeks Meeting Held on
behavior of reserve aggregates consis- November 17, 1981
tent with growth of M-lB from September to December at an annual rate of 7 1. Domestic Policy Directive
percent after allowance for the impact of
flows into NOW accounts and with The information reviewed at this
growth in M-2 at an annual rate around meeting suggested that real GNP
10 percent or slightly higher, recognizing
that the behavior of M-2 will be affected was declining appreciably in the curby recent regulatory and legislative rent quarter, following a slight dechanges, particularly the public's re- cline in the third quarter indicated by
sponse to the availability of the all savers preliminary estimates of the Comcertificate. The Chairman may call for merce Department. Average prices,
Committee consultation if it appears to
the Manager for Domestic Operations as measured by the fixed-weight
that pursuit of the monetary objectives price index for gross domestic busiand related reserve paths during the peri- ness product, appeared to be rising
od before the next meeting is likely to be somewhat less rapidly than on the
associated with a federal funds rate per- average in the first three quarters of
sistently outside a range of 12 to 17
the year.
percent.
Votes for this action: Messrs.
Volcker, Solomon, Boehne, Boykin,
Corrigan, Gramley, Keehn, Partee,
Rice, Schultz, and Mrs. Teeters. Vote
against this action: Mr. Wallich.
Mr. Wallich dissented from this

action because he favored specification of somewhat lower rates for
growth in the monetary aggregates
over the last three months of 1981
than those adopted at this meeting
and was willing to accept a greater
shortfall in growth of M-lB from the
Committee's range for growth over
the year. In his opinion, much of the
shortfall was attributable to a decline



The nominal value of retail sales in
October was down Wi percent from
September and about 1 percent from
the third-quarter average; although
the nominal value had risen about
2VA percent from the second to the
third quarter, sales in real terms had
changed little. In October sales of
automotive products were particularly weak; unit sales of new automobiles fell nearly one-fifth from
September, even though some rebates and special financing arrangements remained in effect.
The index of industrial production
fell 1.5 percent in October, following
a decline of 1.2 percent in Septem-

FOMC Policy Actions
ber. Reductions in both months were
widespread among market groupings, with declines particularly large
in durable materials, construction
supplies, and consumer durable
goods.
Total nonfarm payroll employment declined sharply in October.
Job losses in manufacturing were
sizable, overwhelming moderate
gains in trade and service industries,
and the average factory workweek
remained at a reduced level. The
unemployment rate rose from 7.5 to
8.0 percent.
Private housing starts edged down
in September from an already depressed level. At an annual rate of
less than 1 million units, starts in the
third quarter were one-fourth below
the rate in the first half. Sales of new
houses in September were at their
lowest level in the 18-year history of
the series, and sales of existing
homes continued to decline.
The producer price index for finished goods rose on the average in
September and October at about the
reduced rate of the preceding four
months. The consumer price index
rose at a much faster pace in September and during the third quarter
as a whole than in the first half of the
year. Much of the acceleration reflected the behavior of the homeownership component and food
prices. Over the first 10 months of
1981, the rise in the index of average
hourly earnings was less rapid than it
was during 1980.
In foreign exchange markets the
trade-weighted value of the dollar
against major foreign currencies had
fluctuated over a wide range since
early October. On balance, it declined only a little over the intermeeting interval although U.S.
short-term interest rates fell substan-




135

tially more than foreign short-term
rates. The U.S. trade deficit in September was substantially lower than
the extraordinarily large one in August. For the third quarter, the deficit was little changed from that in the
second quarter. A decline in the value of exports about offset a reduction in imports, which was accounted for largely by oil.
At its meeting on October 5-6, the
Committee had decided that open
market operations in the period until
this meeting should be directed toward behavior of reserve aggregates
consistent with growth of M-1B from
September to December at an annual
rate of 7 percent (after allowance for
shifts into NOW accounts) and with
growth of M-2 at an annual rate of
around 10 percent or slightly higher.
If it appeared to the Manager for
Domestic Operations that pursuit of
the monetary objectives and related
reserve paths during the period before the next meeting was likely to
be associated with a federal funds
rate persistently outside a range of
12 to 17 percent, the Chairman might
call for a Committee consultation.
By late October, incoming data
began to indicate shortfalls in growth
of the monetary aggregates, especially M-1B, from the rates that the
Committee had specified for the
three-month period from September
to December. Subsequently, money
market conditions eased: the federal
funds rate in the days just before this
meeting was about 13Vi percent,
compared with an average of about
15 percent in the four weeks ending
October 28. In the statement week
including the day of the meeting,
borrowings from Federal Reserve
Banks for purposes of adjusting reserve positions were running $300
million to $400 million below the

13 6

FOMC Policy Actions

average of the preceding weeks of
the intermeeting period.
M-1B (adjusted for shifts into
NOW accounts) expanded at an annual rate of about 33/4 percent in
October, following a contraction of 4
percent in September, and M-2 grew
at an annual rate of about 9VA percent. In October the level of shiftadjusted M-1B remained well below
the lower end of the Committee's
range for growth over the year from
the fourth quarter of 1980 to the
fourth quarter of 1981, while the
level of M-2 was at the upper end of
its range for the year.
Expansion in total credit outstanding at U.S. commercial banks
slowed to an annual rate of about 8V2
percent in October, following expansion at annual rates of 10 and IOV2
percent in August and September
respectively. The slowing reflected
in part a moderation in the growth of
business loans from the brisk pace in
the third quarter. Bank holdings of
Treasury securities were unchanged
in October, while acquisitions of
other securities increased. Net issues of commercial paper by nonfinancial corporations slowed substantially, following expansion at
exceptionally rapid rates in August
and September.
Short-term market interest rates
declined about 2V2 to 3]/2 percentage
points over the intermeeting period.
Yields on longer-term securities generally reached record levels around
the end of September but had declined in recent weeks, apparently in
response to incoming evidence of
weakness in economic activity and
reduced pressures in short-term
markets. During the intermeeting period, the prime rate charged on
short-term business loans was reduced by 2 percentage points to 17



percent by most commercial banks,
and to I6V2 percent by a few banks.
On October 30, against the background of the declines in short-term
rates, the Board of Governors announced a reduction in Federal Reserve basic discount rates from 14 to
13 percent. The surcharge on frequent borrowings of large depository
institutions had been reduced from 3
to 2 percentage points on October 9,
and on November 16 it was removed
altogether. In home mortgage markets, average interest rates on new
commitments for fixed-rate conventional loans at savings and loan associations had eased a bit in recent
weeks after reaching a record level
in early October.
In the Committee's discussion of
the economic situation and outlook,
the consensus was that the downward drift in economic activity apparent when the Committee met in
early October had clearly developed
into a recession. Weakness in output
and employment was intensifying in
those industries and regions that had
already been seriously affected, and
it was spreading. As usual, considerable uncertainty existed about the
likely severity and duration of the
recession. It was generally thought,
however, that the scheduled reductions in federal income taxes, the
projected increases in defense
spending along with other elements
in the federal fiscal outlook, and the
decline in interest rates most likely
would generate an upturn in economic activity by the middle of 1982,
although some difference of opinion
existed about the timing of recovery.
At the same time, concern about
inflationary tendencies remained
strong. Some encouraging signs of
an easing in inflationary expectations were noted, but it was also

FOMC Policy Actions
emphasized that such expectations
tended to change slowly; they would
be sensitive to judgments about federal budgetary developments, to the
nature of the newly negotiated collective bargaining agreements, and
to perceptions of the course of monetary policy. Inflationary expectations, as well as the budgetary outlook, would have a major effect on
long-term interest rates and thus on
business financial positions and the
sustainability of the projected recovery in activity.
At its meeting on July 6-7, 1981,
the Committee reaffirmed the monetary growth ranges for the period
from the fourth quarter of 1980 to the
fourth quarter of 1981 that it had set
at its meeting in early February.
These ranges were 3 to 51/2 percent
for M-1A and Vh to 6 percent for
M-1B, abstracting from the impact
of NOW accounts on a nationwide
basis; 6 to 9 percent for M-2; and 6V2
to 9'/2 percent for M-3. The associated range for bank credit was 6 to 9
percent. The Committee recognized
that a shortfall in M-1B growth in the
first half of the year partly reflected
a shift in public preferences toward
other highly liquid assets and that
growth in the broader aggregates had
been running somewhat above the
upper end of the ranges. In light of
its desire to maintain moderate
growth in money over the balance of
the year, the Committee expected
that growth in M-1B for the year
would be near the lower end of its
range. At the same time, growth in
the broader monetary aggregates
might be at the higher end of their
ranges. For the period from the
fourth quarter of 1981 to the fourth
quarter of 1982, the Committee tentatively agreed that growth of M-l,
M-2, and M-3 within ranges of 2xh to



137

5!/2 percent, 6 to 9 percent, and 6V2
to 9Vi percent respectively would be
appropriate.
In reviewing the objectives that it
had established in early October for
growth of M-1B and M-2 over the
final three months of the year, the
Committee continued to face uncertainties with respect to the forces
affecting the behavior of the monetary aggregates, including the apparent decline in the public's desire to
hold transaction balances in the
forms included in M-1B and the expansive effect on M-2 of growth in
money market mutual funds and of
shifts into deposit forms that either
bear a market interest rate or are
subject to variable ceilings closely
related to market rates. Growth of
M-1B in October had fallen below
the 7 percent annual rate that the
Committee had adopted for growth
over the final three months of the
year. M-2, meanwhile, had grown at
an annual rate only slightly less than
the 10 percent that had been specified for the final three months and
remained close to the upper end of
its range for the year.
Committee members continued to
agree on the desirability of seeking
somewhat more rapid growth in
M-1B, while taking account of the
relative strength of the broader monetary aggregates. At the same time,
however, questions were raised
about how aggressively more rapid
growth in M-lB should be pursued in
the short period before the end of the
year. The view was expressed that
objectives for growth of M-lB over
that interval should take account of
the desirability of a smooth transition to the targets for monetary
growth tentatively established for
1982 as well as the relatively rapid
growth in the broader aggregates.

13 8

FOMC Policy Actions

While recognizing the variability of
demands for money over the short
run, many members thought that an
aggressive effort to stimulate M-1B
growth over November and December at a pace sufficiently rapid to
compensate for the shortfall in October would interfere with achievement of longer-term economic goals
and would risk overly rapid expansion of money and credit in later
months, particularly if the effort
were accompanied by a precipitous
decline in short-term interest rates to
levels that might not be sustainable.
Such a decline in short-term rates
could exacerbate inflationary expectations and abort a desirable downtrend in bond yields and mortgage
interest rates.
Committee members in general
believed that additional weakness in
economic activity could well be accompanied by further declines in interest rates, which would be constructive in supporting economic
activity. In that light, they wished to
set objectives for monetary growth
over the period ahead consistent
with achieving further progress in
reducing inflationary expectations
and with minimizing the risk of destabilizing swings in both monetary
growth and interest rates. Their view
was reinforced by the concern that
projection of large budgetary deficits
in the years ahead, combined with
inflationary sensitivities, could generate anticipations of a reversal of
favorable interest rate trends as recovery in activity got under way.
After noting the moderate shortfall in growth of M-1B in October
from the 7 percent annual rate that
had been adopted for growth from
September to December, the Committee decided to seek behavior of
reserve aggregates associated with



growth of M-1B from October to
December at an annual rate of about
7 percent (after allowance for the
impact of flows into NOW accounts)
and with growth of M-2 at an annual
rate of around 11 percent. It was
understood that somewhat more rapid growth of M-1B, consistent with
the objective for growth over the
fourth quarter adopted at the previous meeting, would be accepted in
the event that transaction demands
for money proved to be stronger
than anticipated; it was also understood that moderate shortfalls from
the growth path would not be unacceptable, particularly if broader aggregates continued to expand rapidly. The intermeeting range for the
federal funds rate that provided a
mechanism for initiating further consultation of the Committee was set at
11 to 15 percent.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real GNP is declining
appreciably in the current quarter and
that prices on the average are rising
somewhat less rapidly than over the first
three quarters of the year. In October the
nominal value of total retail sales
dropped; industrial production fell more
than in September; and nonfarm payroll
employment, especially in manufacturing, declined sharply. The unemployment rate rose from 7.5 percent to 8.0
percent. Housing starts edged down in
September from an already depressed
level. Over the first 10 months of 1981,
the rise in the index of average hourly
earnings was less rapid than during 1980.
The weighted average value of the
dollar against major foreign currencies
has declined only a little since early
October, although U.S. short-term interest rates have declined more than foreign
rates. A reduced U.S. foreign trade deficit in September brought the deficit for
the third quarter close to the secondquarter rate.

FOMC Policy Actions
M-1B (adjusted for estimated shifts
into NOW accounts) expanded in October almost as much as it had declined in
September, and growth of M-2 picked
up. The level of adjusted M-1B remained
well below the lower end of the Committee's range for growth over the year from
the fourth quarter of 1980 to the fourth
quarter of 1981; the level of M-2 was at
the upper end of its range for the year.
Short-term market interest rates have
declined substantially since the end of
September, and bond yields have also
dropped from the peaks generally
reached about then. On October 30 the
Board of Governors announced a reduction in Federal Reserve basic discount
rates from 14 to 13 percent. The surcharge on frequent borrowings of large
depository institutions had been reduced
from 3 to 2 percentage points on October
9, and on November 16 the Board removed the remaining 2 percentage
points.
The Federal Open Market Committee
seeks to foster monetary and financial
conditions that will help to reduce inflation, promote a resumption of growth in
output on a sustainable basis, and contribute to a sustainable pattern of international transactions. At its meeting in
early July, the Committee agreed that its
objectives would be furthered by reaffirming the monetary growth ranges for
the period from the fourth quarter of
1980 to the fourth quarter of 1981 that it
had set at the February meeting. These
ranges included growth of 3V2 to 6 percent for M-1B, abstracting from the impact of flows into NOW accounts on a
nationwide basis, and growth of 6 to 9
percent and 6V2 to 9Vi percent for M-2
and M-3 respectively. The Committee
recognized that the shortfall in M-1B
growth in the first half of the year partly
reflected a shift in public preferences
toward other highly liquid assets and that
growth in the broader aggregates had
been running at about or somewhat
above the upper end of their ranges. In
light of its desire to maintain moderate
growth in money over the balance of the
year, the Committee expected that
growth in M-1B for the year would be
near the lower end of its range. At the
same time, growth in the broader aggregates might be high in their ranges. The
associated range for bank credit was 6 to



139

9 percent. The Committee also tentatively agreed that for the period from the
fourth quarter of 1981 to the fourth quarter of 1982 growth of M-l, M-2, and M-3
within ranges of 2V2 to 5Vi percent, 6 to 9
percent, and 6V2 to 9V2 percent respectively would be appropriate. These
ranges will be reconsidered as warranted
to take account of developing experience
with public preferences for NOW and
similar accounts as well as changing economic and financial conditions.
The Committee, after noting a moderate shortfall in growth of M-lB in October from the target path set at the last
meeting, seeks behavior of reserve aggregates consistent with growth of M-lB
from October to December at an annual
rate of about 7 percent (after allowance
for the impact of flows into NOW accounts) and with growth of M-2 at an
annual rate around 11 percent. The
Chairman may call for Committee consultation if it appears to the Manager for
Domestic Operations that pursuit of the
monetary objectives and related reserve
paths during the period before the next
meeting is likely to be associated with a
federal funds rate persistently outside a
range of 11 to 15 percent.
Votes for this action: Messrs.
Volcker, Solomon, Boehne, Boy kin,
Corrigan, Gramley, Keehn, Partee,
Rice, Schultz, Mrs. Teeters, and Mr.
Wallich. Votes against this action:
None.

2. Authorization for Domestic
Open Market Operations
On December 4, 1981, the Committee 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 December 22,
1981.

140

FOMC Policy Actions

Votes for this action: Messrs.
Volcker, Solomon, Boehne, Boykin,
Corrigan, Gramley, Keehn, Partee,
Rice, Schultz, and Mrs. Teeters.
Votes against this action: None. Absent: Mr. Wallich.

and durable goods materials. Capacity utilization in manufacturing fell
2 percentage points further to 74.9
percent, equal to its recent trough in
July 1980.
Total nonfarm payroll employThis action was taken on recom- ment declined by nearly lA million in
mendation of the Manager for Do- November, the same as in October.
mestic Operations. The Manager Employment decreases in both
had advised that since the Novem- months were concentrated in manuber meeting, substantial net pur- facturing, and in November the
chases of securities had been under- trade sector registered its first detaken to provide reserves in cline since June 1980. The unemassociation with a seasonal increase ployment rate rose an additional 0.4
in currency in circulation. The lee- percentage point to 8.4 percent.
way for further purchases had been
The nominal value of retail sales,
reduced to about $900 million, and which had declined 2.1 percent in
additional purchases in excess of October, rose 0.8 percent in Novemthat amount were likely to be re- ber; the level in November remained
quired before the next Committee well below the average for the third
meeting.
quarter. Unit sales of new automobiles, although up slightly in November, continued at a depressed rate.
Private housing starts in NovemMeeting Held on
ber, at an annual rate of about
December 21-22, 1981
870,000 units, changed little from the
depressed level of October. Sales of
1. Domestic Policy Directive
new homes picked up in October,
The information reviewed at this while sales of existing homes
meeting suggested that real GNP de- dropped further; total sales of new
clined appreciably in the fourth quar- and existing homes were about oneter, after having increased at an annu- third below the pace in 1980.
al rate of 1.4 percent in the third
The producer price index for finquarter, according to revised esti- ished goods rose 0.5 percent in Nomates of the Commerce Department. vember, about the same as in OctoAverage prices, as measured by the ber. Food prices declined in
fixed-weight price index for gross do- November while prices of energymestic business product, appeared to related items, particularly gasoline
have risen less rapidly than over the and natural gas, rose.' During the
first three quarters of the year.
first eleven months of 1981, the finIn November the index of indus- ished goods index increased at an
trial production fell 2.1 percent, the annual rate of about 7!/2 percent,
largest of four consecutive monthly well below the increase of nearly 12
declines. The decline was broadly percent over 1980. The consumer
based, reflecting reductions in out- price index rose about 0.4 percent
put for nearly all major product and 0.5 percent in October and Nogroupings, and was particularly vember respectively; through Nosharp for durable consumer goods vember of this year the index in-




FOMC Policy Actions
creased at an annual rate of about
9Vi percent, compared with a rise of
about 12V2 percent over 1980. The
rise in the index of average hourly
earnings was somewhat less rapid
thus far in 1981 than during 1980.
In foreign exchange markets the
trade-weighted value of the dollar
had changed little on balance since
mid-November, as a decline through
the end of November was more than
reversed in early December. Trading
conditions in the final week of the
intermeeting period were unsettled
by the declaration of martial law in
Poland. The U.S. trade deficit in
October widened substantially from
the unusually low rate in September.
The average for the two months was
about the same as that for July and
August, but larger than that recorded in the first and second quarters of
the year.
At its meeting on November 17,
the Committee had noted the moderate shortfall in growth of M-1B in
October from the 7 percent annual
rate from September to December
adopted at the preceding meeting
and had decided that open market
operations in the period until this
meeting should be directed toward
behavior of reserve aggregates consistent with growth of M-1B from
October to December at an annual
rate of about 7 percent (after allowance for shifts into NOW accounts)
and with growth of M-2 at an annual
rate of around 11 percent. It was
understood that somewhat more rapid growth of M-1B, consistent with
the objective adopted at the preceding meeting, would be accepted. If it
appeared to the Manager for Domestic Operations that pursuit of the
monetary objectives and related reserve paths during the period before
the next meeting was likely to be



141

associated with a federal funds rate
persistently outside a range of 11 to
15 percent, the Chairman might call
for a Committee consultation.
In the event, M-1B (adjusted for
shifts into NOW accounts) expanded
in November and early December at
rates somewhat above the Octoberto-December path, as checkable deposits other than demand deposits
rose markedly. Nevertheless, growth
of M-1B from the third to the fourth
quarter (partly estimated) was at an
annual rate of only about 4!/2 percent; and growth over the year from
the fourth quarter of 1980 to the
fourth quarter of 1981 was about 2
percent, well below the Committee's
range of Vh to 6 percent. Growth of
M-2 accelerated in November to the
highest rate so far in 1981, reflecting
a surge in its nontransaction component in addition to the strength in
M-1B. Growth over the year ending
in the fourth quarter of 1981 was
estimated at about 9!/2 percent,
somewhat above the Committee's
range of 6 to 9 percent for the year.
Growth in nonborrowed reserves
picked up in November and thus far
in December from the October rate,
but on balance remained well below
the pace of last summer. Borrowings
from Federal Reserve Banks for purposes of adjusting reserve positions
remained relatively low on the average in the five weeks of the intermeeting period; they were little
changed from those in the week ending November 18 and were well below levels in the immediately preceding weeks. The federal funds rate
declined from about 13 lA percent in
the days just before the November
meeting to around 12 percent in early December and then moved up into
a range of 12 to \2Vi percent. On
December 3 the Board of Governors

142

FOMC Policy Actions

announced a reduction in Federal
Reserve discount rates from 13 to 12
percent to bring them into better
alignment with the short-term rates
that had recently been prevailing in
the market.
Short-term market interest rates
declined about 3A to 1 percentage
point further in the latter part of
November, and bond yields moved
down about lA to Vi percentage
point. Subsequently, most market
rates rose to levels close to or somewhat higher than those prevailing at
the time of the mid-November
FOMC meeting, apparently in response to strength in the monetary
aggregates and reports of administration estimates of substantially enlarged budget deficits. However, the
prime rate charged by commercial
banks on short-term business loans
was reduced about 1 percentage
point further to 15% percent over the
intermeeting period, and the average
rate for primary conventional mortgages also declined about 1 percentage point.
Expansion in total credit outstanding at U.S. commercial banks slowed
to an annual rate of about 3lA percent
in November. The slowing reflected
primarily a sharp reduction in bank
holdings of Treasury securities and a
further moderation in the growth of
business loans. Short-term borrowing
by businesses through issuance of
commercial paper rose substantially,
however, as the spread between commercial bank prime rates and market
interest rates widened. In response to
the decline in long-term interest rates,
moreover, the volume of public offerings of corporate bonds rose in November to a record level; the pace of
offerings slowed in early December
but was still relatively large.
The staff projections presented at



this meeting suggested that real GNP
would continue to decline in the first
quarter of 1982, although at a pace
considerably slower than that estimated for the fourth quarter of 1981,
and that activity would begin to recover in the second quarter. The
unemployment rate was expected to
rise somewhat further to a peak in
the second quarter of the new year.
The rise in the fixed-weight price
index for gross domestic business
product was projected to slow further in the quarters ahead.
In the Committee's discussion of
the economic situation and outlook,
the consensus was that real GNP
was declining appreciably in the current quarter. It was suggested that
the overall reduction in output was
likely to be at least as deep as the
average decline in recessions since
the Second World War, but it was
also observed that uncertainty concerning the likely severity of a recession typically was great at this early
stage. Business capital spending was
one sector that seemed vulnerable to
a weaker performance than was generally being projected. The mood in
the business community, particularly the industrial sector, was described as gloomy, because of the
sluggish economic growth in recent
years, the currently low rates of capacity utilization, and the widespread expectation of huge federal
budget deficits and high real interest
rates.
It was also observed, however,
that the risk of significant further
contraction in the housing and auto
sectors appeared small. Those sectors were likely to benefit from the
declines in interest rates that had
already occurred. Moreover, the income tax reductions already legislated were generally expected to con-

FOMC Policy Actions
tribute to an upturn in economic
activity by the middle of 1982.
With respect to the outlook for
continued progress in reducing inflationary pressures, the view was expressed that the climate appeared to
be more favorable for moderation in
negotiation of new labor contracts
and in pricing decisions than it had
been for many years. In some industries and regions, measures to preserve jobs were coming to be viewed
as more important than improvements in wages and benefits. Competition from imports, moreover,
was exerting a restraining influence
on wages and prices.
At its meeting in July 1981, the
Committee had reaffirmed the monetary growth ranges for the period
from the fourth quarter of 1980 to the
fourth quarter of 1981 that it had set
at its meeting in early February.
These ranges were 3 to 5!/2 percent
for M-1A and 3!/2 to 6 percent for
M-1B, abstracting from the impact
of NOW accounts on a nationwide
basis; 6 to 9 percent for M-2; and 61/2
to 916 percent for M-3. The associated range for bank credit was 6 to 9
percent. The Committee had recognized that a shortfall in M-1B growth
in the first half of the year partly
reflected a shift in public preferences
toward other highly liquid assets and
that growth in the broader aggregates had been running somewhat
above the upper end of the ranges.
In light of its desire to maintain
moderate growth in money over the
balance of the year, the Committee
expected that growth in M-1B for the
year would be near the lower end of
its range. At the same time, growth
in the broader monetary aggregates
might be at the higher end of their
ranges. For the period from the
fourth quarter of 1981 to the fourth



143

quarter of 1982, the Committee had
tentatively agreed that growth of
M-l, M-2, and M-3 within ranges of
2Vi to 5Vi percent, 6 to 9 percent,
and 6V2 to 9Vi percent respectively
would be appropriate. At this meeting, the Committee began a review
of the ranges for 1982 in the expectation that at the meeting scheduled
for early February it would complete
the review and establish ranges for
the year within the framework of the
Full Employment and Balanced
Growth Act of 1978 (the HumphreyHawkins Act).
In looking ahead to 1982, it had
been decided earlier to abandon as
of the beginning of the year the compilation of M-l A and the shift-adjusted M-l B (that is, M-1B adjusted to
exclude that portion of flows into
NOW accounts in 1981 estimated to
have come from other interest-bearing assets rather than from demand
deposits). That decision was based
on a judgment that, after a full year
of availability of NOW accounts on a
national basis, the magnitude of additional shifts might no longer be
significant, and that in any event, it
would not be possible to make reliable estimates of the sources of
funds flowing into such accounts.
The remaining aggregate for M-l in
1982 will be the one formerly labeled
M-1B, which includes the total
amount of NOW accounts.
In the near-term pursuit of the
fundamental objective of fostering
the financial conditions that would
help to reduce inflation and promote
recovery in economic activity on a
sustainable basis, the Committee
continued to face considerable uncertainty about the interpretation of
the behavior of the monetary aggregates. Growth of other checkable
deposits (OCD) had picked up sharp-

144

FOMC Policy Actions

ly in November and early December. (Such deposits include NOW
accounts and ATS accounts at banks
and thrift institutions and credit
union share draft accounts.) Moreover, the surge in OCD was accompanied by a renewal of flows into
savings deposits at commercial
banks and continuation of substantial flows into money market mutual
funds, which raised growth of M-2 in
November to the highest rate so far
in 1981. Given the volatility of the
behavior of the monetary aggregates
in the short run, it seemed that the
recent spurt might have resulted
partly from an expansion of highly
liquid precautionary balances at a
time of considerable uncertainty
about near-term economic and financial conditions, as well as a response
to the lower level of market interest
rates in earlier weeks.
The Committee decided to specify
monetary growth rates for the fourmonth period from November 1981
to March 1982, because data for December were necessarily incomplete
at the time of the meeting. It was
generally recognized that a marked
slowing in monetary growth in the
early months of 1982 from the rapid
pace in November and early December was desirable. Some members
stressed the desirability of specifying growth rates for both M-l and
M-2 for the four-month period that
would be within the ranges that had
been tentatively adopted for 1982,
partly with a view to avoiding any
possible misunderstanding of the
Committee's objectives in the period
before completion of the review of
its growth ranges for 1982. Other
members stressed the importance of
avoiding an abrupt deceleration of
monetary growth in the first quarter
of 1982, particularly if accompanied



by upward interest rate pressures,
because such developments might
well hamper recovery in economic
activity. A number of members were
willing to accept relatively rapid
growth in the period ahead, to the
extent that it reflected a continuation
of the recent behavior of other
checkable deposits and thus might
reflect expansion in its sizable savings component.
At the conclusion of the discussion, the Committee decided to seek
behavior of reserve aggregates associated with growth of M-l and M-2
from November 1981 to March 1982
at annual rates of around 4 to 5
percent and around 9 to 10 percent
respectively. In setting the objective
for M-l, the Committee took account of the relatively rapid growth
that had already taken place through
the first part of December. It also
recognized that interpretation of actual money growth might need to
take account of the significance of
fluctuations in NOW accounts,
which recently had been growing
relatively rapidly. The intermeeting
range for the federal funds rate that
provides a mechanism for initiating
consultation of the Committee was
set at 10 to 14 percent.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real GNP declined appreciably in the fourth quarter and that
prices on the average rose less rapidly
than over the first three quarters of the
year. In November industrial production
fell more than in preceding months; nonfarm payroll employment, especially in
manufacturing, declined sharply further;
and the unemployment rate rose an additional 0.4 percentage point to 8.4 percent. The nominal value of retail sales
increased, but the level was still well
below the average for the third quarter.

FOMC Policy Actions

145

Housing starts remained at a depressed been running at about or somewhat
level. The rise in the index of average above the upper end of their ranges. In
hourly earnings has been somewhat less light of its desire to maintain moderate
growth in money over the balance of the
rapid this year than during 1980.
The weighted average value of the year, the Committee expected that
dollar against major foreign currencies growth in M-1B for the year would be
has changed little on balance since mid- near the lower end of its range. At the
November. The U.S. foreign trade defi- same time, growth in the broader aggrecit in October widened substantially gates might be high in their ranges. The
from the unusually low rate in Septem- associated range for bank credit was 6 to
ber, and the average for the two months 9 percent. The Committee also tentativewas about the same as that for July and ly agreed that for the period from the
fourth quarter of 1981 to the fourth quarAugust.
M-1B (adjusted for estimated shifts ter of 1982 growth of M-l, M-2, and M-3
into NOW accounts) expanded substan- within ranges of 2Vi to 5Vi percent, 6 to 9
tially in November and early December, percent, and 6V2 to 9Vi percent respecbut its level in November was still well tively would be appropriate.
below the lower end of the Committee's
In the short run, the Committee seeks
range for growth over the year from the behavior of reserve aggregates consistfourth quarter of 1980 to the fourth quar- ent with growth of M-l and M-2 from
ter of 1981. Growth of M-2 accelerated November 1981 to March at annual rates
sharply in November, raising its level of around 4 to 5 percent and 9 to 10
above the upper end of its range for the percent respectively. The target for M-l
year. Short-term market interest rates no longer reflects the "shift-adjustment"
and bond yields continued to decline in for conversion of outstanding interestthe latter part of November, but since bearing assets into new NOW accounts,
then they have risen to levels generally formerly estimated in the "shift-adjusthigher than those of mid-November; ed" M-1B series. In setting the M-l
over the period since mid-November, target the Committee took account of the
mortgage interest rates have declined relatively rapid growth that had already
further. On December 3 the Board of taken place through the first part of
Governors announced a reduction in December; it also recognized that interFederal Reserve basic discount rates pretation of actual money growth may
from 13 to 12 percent.
need to take account of the significance
The Federal Open Market Committee of fluctuations in NOW accounts, which
seeks to foster monetary and financial have recently been growing relatively
conditions that will help to reduce infla- rapidly. The Chairman may call for Comtion, promote a resumption of growth in mittee consultation if it appears to the
output on a sustainable basis, and con- Manager for Domestic Operations that
tribute to a sustainable pattern of inter- pursuit of the monetary objectives and
national transactions. At its meeting in related reserve paths during the period
early July, the Committee agreed that its before the next meeting is likely to be
objectives would be furthered by reaf- associated with a federal funds rate perfirming the monetary growth ranges for sistently outside a range of 10 to 14
the period from the fourth quarter of percent.
1980 to the fourth quarter of 1981 that it
Votes for this action: Messrs.
had set at the February meeting. These
Volcker, Boehne, Corrigan, Gramley,
ranges included growth of Vh to 6 perKeehn, Partee, Rice, Schultz, Mrs.
cent for M-1B, abstracting from the imTeeters, and Mr. Wallich. Votes
pact of flows into NOW accounts on a
against this action: Messrs. Solomon
nationwide basis, and growth of 6 to 9
and Boykin.
percent and 6!/2 to 9Vi percent for M-2
and M-3 respectively. The Committee
recognized that the shortfall in M-1B
Mr. Solomon dissented from this
growth in the first half of the year partly
action because he felt it was particureflected a shift in public preferences
toward other highly liquid assets and that larly important at the beginning of an
growth in the broader aggregates had annual target period that the Com


146

FOMC Policy Actions

mittee not formulate its directive in
terms that conveyed an unrealistic
sense of precision. In his view, the
directive language referring to the
November-to-March growth rates in
M-l and M-2 did seem to convey
such a sense.
Mr. Boykin dissented from this
action because he favored specification of somewhat lower rates for
growth in the monetary aggregates
from November to March. For M-2
in particular, he stressed the desirability of specifying a rate no higher
than the range of 6 to 9 percent that
had earlier been tentatively adopted
for growth over 1982, with a view to
avoiding a possible interpretation
that the Committee had implicitly
raised its objective before completion of the current review of the
growth ranges for 1982.
2. Authorization for Domestic
Open Market Operations
At this meeting the Committee
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 February 2,
1982.
Votes for this action: Messrs.
Volcker, Solomon, Boehne, Boykin,
Corrigan, Gramley, Keehn, Partee,
Rice, Schultz, Mrs. Teeters, and Mr.
Wallich. Votes against this action:
None.
This action was taken on recommendation of the Manager for Domestic Operations. The Manager
had advised that substantial net sales
of securities were likely to be required during January in order to
absorb reserves that had been provided over recent weeks to meet
seasonal needs for currency in circulation.

147

Consumer and Community Affairs
The year 1981 was one of simplification, consolidation, and reorganization
of the Board's consumer credit regulations by its Division of Consumer
and Community Affairs. Under the
Board's ongoing Regulatory Improvement Project, all regulations are being
reviewed, simplified, and modernized.1
On March 26, 1981, the Board
published a restructured, shortened,
and simplified version of Regulation Z,
which implements the Truth in Lending Act. The Board began work on
simplification of this regulation in
1977, while suggesting to the Congress that the act be made less complex to permit more thorough clarification and simplification of the
implementing regulation. The Congress responded by passing the Truth
in Lending Simplification and Reform
Act of 1980, after which the Board
rewrote Regulation Z to implement
the new act. Compared with the old
version, the new one is 40 percent
shorter; it is easier to use, because of
a complete restructuring; its language
is simpler, of plain English easily
understood yet covering the necessary
requirements; and by virtue of a
line-by-line reworking, it is completely
up-to-date and without nonessential
provisions.2
In other regulatory developments,
1. For details on these reviews and
simplifications, see the section "Regulatory
Simplification" in this REPORT.
2. Regulation Z was effective April 1,
1981, but not mandatory until October 1,
1982, under legislation, signed into law on
December 26, 1981, that postpones the
mandatory effective date of the Simplification Act.



the Board issued a staff commentary
on Regulation Z that replaces individual interpretations of the regulation; published consumer leasing provisions of Regulation Z as a separate
Regulation M; printed a revised and
simplified Regulation C, implementing
the Home Mortgage Disclosure Act,
that is nearly a third shorter, and that
focuses on the most useful disclosure
requirements and those that can be
provided at reasonable costs; and
issued a staff commentary on Regulation E, implementing the Electronic
Fund Transfer Act, that sets objective standards for both compliance
and enforcement.
Two rulings of the Supreme Court
strengthened the legal standing of
Board and staff interpretations of
Board regulations.3 On September 8,
1981, the Board, for the first time,
denied an application for expansion
of a bank holding company chiefly
on the grounds of violations of consumer credit laws.4
On October 7, 1981, the Board
approved a policy statement and implementing guidelines for enforcement of the Equal Credit Opportunity
Act and the Fair Housing Act. These
actions relate to corrective measures
to be taken by state member banks
when the most serious violations of
these laws occur.
3. Anderson Bros. Ford v. Valencia,
49 U.S.L.W. 4635 (1981), and Ford Motor
Credit Co. v. Milhollin, 444 U.S. 555
(1980).
4. The application was by First State
Holding Company, Inc., Joplin, Missouri.
See Federal Reserve Bulletin, vol. 67
(October 1981), pp. 802^-03.

148

Consumer and Community Affairs

In 1981, the Board requested each
Reserve Bank to appoint a Community
Affairs Officer to serve as the principal contact at the Reserve Bank for
questions about the Community Reinvestment Act of 1977. These officers
provide banks and neighborhood
organizations with information about
the Board's procedures on applications and handling of protests; they
also serve an education function and
as conduits for information regarding various community development
programs that are available through
both the public and the private sectors.
Educational Activities
In 1981, the Board and the Reserve
Banks continued to provide a variety
of educational materials and services
to consumers and to teachers, expanding a Systemwide effort to help both
consumers and creditors comply with
and make use of the consumer credit
protection laws.
About a million copies of the
Consumer Handbook to Credit Protection Laws, now in its fifth printing,
were distributed, many in quantity to
consumer organizations and for classroom use, and many to individuals
through the network of the Government Services Administration's Consumer Information Center in Pueblo,
Colorado. About a million copies of
Alice in Debitland, a 16-page booklet
explaining consumer protections under
the Electronic Fund Transfer Act,
were also distributed, as were more
than a million copies of a series of
consumer pamphlets explaining individual aspects of the consumer credit
laws, such as credit-card use, equal
credit opportunity, and ways to file a
consumer credit complaint.
The Board and the Reserve Banks
also expanded their efforts to reach



consumer and economic educators
during 1981. At the Board, teacher
workshops were held in conjunction
with the Maryland Council on Economic Education, and many of the
Reserve Banks began or added to
workshop series. New curriculum
units were also made available during
the year. For example, the Federal
Reserve Bank of St. Louis produced
"Teaching about Credit: Activities
for Secondary Classes," and the Minneapolis Reserve Bank is preparing a
teaching package covering credit protection laws and the economics of
consumer credit protection.
The Federal Reserve Bank of Chicago began a consumer newsletter
that was designed to supply educators
with information and with ideas for
classroom use.
Two films on consumer credit continued to be popular during the year.
They were UEFT: At Your Service,"
seen by about three-quarters of a
million viewers, and "To Your
Credit," which reached an audience
of about two million.
In addition, the Board undertook
a new program, as described in the
following section "Truth in Lending,"
to help creditors comply with the
simplified Regulation Z.
Truth in Lending
This 13th Annual Report on the
Truth in Lending Act summarizes
the efforts in 1981 of the Board of
Governors of the Federal Reserve
System to simplify its truth in lending
rules, to minimize compliance burdens, and to educate creditors and
regulators about truth in lending. It
also discusses compliance with the
act, uniform enforcement policies,
actions of the Consumer Advisory

Consumer and Community Affairs
Council, legislation affecting the act,
and legislative recommendations.

The Revised Regulation

149

issued on October 9, 1981, as "Official Staff Interpretation TIL-1" (46
F.R. 50288), will be updated and
revised as necessary and will substitute for individually issued interpretations.
The Board contemplates keeping
revisions to both the regulation and
the commentary to a minimum to reduce the creditors' burden of keeping
track of frequent changes. However,
the Board recognizes that new credit
practices, new court cases, and other
rapidly evolving developments in the
credit industry may create a need for
changes in the truth in lending law
and Regulation Z.

After enactment of the Truth in Lending Simplification and Reform Act,
a revised Regulation Z was issued by
the Board on April 7, 1981 (46 F.R.
20848). The new regulation reduces
burdens on creditors while preserving the rights of consumers to information needed to compare the costs
of credit. It represents the culmination of several years of effort to
reduce the difficulties of compliance,
to clear up troublesome ambiguities
that had been the source of much
litigation, and to make credit disclosures more meaningful to con- Education
sumers.
In May, the Board launched a SystemOne of the most important con- wide program to help creditors and
tributions both to cutting compliance agency personnel understand the new
costs and to insuring clear presenta- truth in lending rules and to plan comtion of disclosures is the inclusion of pliance and enforcement procedures
model disclosure forms. The forms in advance of the mandatory compliassure compliance with the act pro- ance date of October 1, 1982. The
vided they are properly used by credi- teaching device used was a slide pretors. They give a precise format to sentation of major changes in the
follow as well as clear guidance in rules that affect the practices of credipresenting information to creditors tors. At the outset, Board staff memwho prefer to design their own forms. bers presented the program to about
Other major aspects of the Board's 5,000 supervisory agency personnel
effort to reduce compliance burdens and creditors at the Federal Reserve
include the adoption of clear-cut Banks and, later, in other presentarules that the Board hopes will re- tions, to about 8,000 creditors. Using
quire less interpretation and thereby the same presentation package, each
reduce litigation, and the use of Reserve Bank then launched its own
"plain English" in the regulation. The regional effort. By the end of Noregulation, which is now 40 percent vember, the Federal Reserve Banks
shorter than it was, was also reorga- had reached an additional 22,000
nized to make it easier to use. In people. Thus, by the end of the year,
addition, the Board has integrated the System had presented the prothe interpretations of Regulation Z, gram to about 35,000 people.
In addition, the Reserve Banks
unofficial and official staff opinions
as well as formal Board interpreta- have distributed copies of the pretions, into a commentary on Regu- sentation script to the public upon
lation Z. This single document, request. More than 400 copies of



150

Consumer and Community Affairs

the script have been sent to banks,
savings and loans associations, credit
unions, retailers, lawyers, and regulatory personnel who have used them
for internal training and other purposes.
A condensed videotape of the presentation is available on loan from
the Board of Governors and the Federal Reserve Banks of Boston, Richmond, and Cleveland. The System is
experimenting with videotape teleconferences in an effort to make the
presentations widely available at a
reasonable cost.

Two cease-and-desist orders for
violations of the act, one by the Board
of Governors and the other by the
FDIC, were issued in 1981.
Summaries of examination findings
compiled by the Board of Governors,
the FDIC, the FHLBB, the OCC,
and the NCUA indicate that the most
frequent violations involve the failure to (1) use required terms such as
"total of payments" and "balloon payment," (2) disclose properly the payment schedule, (3) disclose the correct annual percentage rate or finance
charge, (4) disclose properly the
"amount financed," using that term,
and (5) describe adequately any
Compliance
property that secures credit. The
The five federal agencies that super- Board anticipates that use of the
visefinancialinstitutions reported sub- model forms by creditors and the
stantial compliance in 1981 with the increased flexibility of the revised
"old" Regulation Z. About 25 per- regulation should help reduce noncent of the institutions examined compliance in most of these areas.
were in full compliance, and 56 perThe Civil Aeronautics Board
cent were found to be in violation of (CAB), the Farm Credit Adminisno more than a few provisions of the tration, and the Packers and Stockregulation. The Board of Governors, yards Administration reported high
the Federal Deposit Insurance Corpo- levels of compliance with the act in
ration (FDIC), and the Office of the 1981. However, the CAB entered
Comptroller of the Currency (OCC) into consent orders with 10 air carreported slight decreases (ranging riers for failure to credit refunds
from 3 to 9 percent) in the percent- promptly to consumers as required
age of examined institutions found by the act and by Regulation Z.
not to be in compliance. The Federal
The Federal Trade Commission
Home Loan Bank Board (FHLBB) (FTC) reported that its 1981 project
reported no change from 1980 in the to improve compliance with the adnumber of noncomplying institutions; vertising requirements of the act rethat agency, however, indicates a sulted in settlements involving civil
21 percent decrease in the number of penalties with 12 firms in the housing
violations discovered. The National industry. The FTC reported that
Credit Union Administration (NCUA) compliance with the advertising rereported an 8 percent increase in the quirements appeared to have impercentage of noncomplying institu- proved, perhaps because of the pubtions; this increase may be attribut- licity of these settlements. The
able to the more thorough checking commission also entered into consent
made possible by NCUA's relatively agreements with an automobile dealer
new and separate examination pro- and a retail business involving truth
gram dealing with consumer affairs. in lending advertising rules and Fair



Consumer and Community Affairs
Credit Billing Act requirements respectively.
The FTC reported that it planned
to release at the end of 1981 the
results of its investigation to determine whether creditors are giving
consumers accurate disclosures of
credit costs. The FTC also reported
continued evidence that some creditors orally contradict the written disclosures that credit accident and life
insurance in closed-end credit transactions is voluntary, as well as continued consumer complaints suggesting that compliance with the Fair
Credit Billing Act has not measurably
increased. With regard to the Consumer Leasing Act, the FTC has
focused on seeking voluntary corrections of individual violations, rather
than on conducting investigations, because of difficulties in distinguishing
between the consumer leasing and
the business leasing of lessors.

Uniform Enforcement Actions
Since July 1980, thefivefederal agencies that make up the Federal Financial Institutions Examination Council
(FFIEC) 5 have been enforcing the
restitution provisions of the act, using
a policy guide that was developed by
the Task Force on Consumer Compliance for the FFIEC and was later
adopted by all the agencies. These
provisions require that agencies order creditors to adjust the consumer's
account in cases in which annual percentage rates or finance charges are
understated as a result of a clear and
consistent pattern or practice of vio5. The FFIEC is the Board of Governors
of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Federal
Home Loan Bank Board, the Office of the
Comptroller of the Currency, and the National Credit Union Administration.




151

lation, gross negligence, or a willful
violation that was intended to mislead the consumer. The agencies
reported a high degree of voluntary
restitution by the institutions they
supervise; since March 1980, approximately 1,800 institutions have reimbursed $4.7 million on an estimated
128,000 accounts. These figures include reimbursements made in connection with violations cited before
enactment of the restitution provisions.
Consumer Advisory Council
In 1981, the Federal Reserve's Consumer Advisory Council met four
times to discuss consumer-related
issues, including truth in lending rules
and enforcement. The council discussed the use of estimates in credit
disclosures, the unit-cost disclosure
of credit insurance charges, the tolerances for annual percentage rates
and finance charges, the model forms,
the Regulation Z commentary, and
the preemption of state law by the
Truth in Lending Act.
In April, the council adopted a
resolution urging the Board to defer
requests for integrating the errorresolution and liability requirements
of the Truth in Lending and the Electronic Fund Transfer Acts. The resolution suggests no changes be made
until the Permanent Editorial Board
for the Uniform Consumer Code sets
forth a final version of its proposed
Uniform Payments Code for consideration by the states.
In September, the council's committee on legislation advised the
Board that it believed real estate
brokers who arrange financing by
sellers more than five times a year
should be required to provide truth
in lending disclosures. (As is dis-

152

Consumer and Community Affairs

cussed more fully in "Proposed
Amendments" below, the Board
proposed in October 1981 that the
term "arranger of credit" be so
amended in the revised Regulation Z.)

Amendments

the Truth in Lending Act is now being considered by the Congress. The
proposed Financial Institutions Restructuring and Services Act of 1981
(S. 1720, 97th Congress, 1st Session)
would allow the Truth in Lending Act
to supersede similar state laws (section 704(b)), would delete coverage
of "arrangers" under the act (section 703), and would provide that a
creditor is not civilly liable under the
act unless its actions reflect "substantial noncompliance" (section 705(a)).

The Cash Discount Act, amendments
to the Higher Education Act, and the
International Banking Facility Deposit Insurance Act, which were
passed after the Truth in Lending
Simplification and Reform Act, have
affected certain requirements in that Proposed Amendments
statute. Section 101 of the Cash Dis- The revised Regulation Z defines an
count Act (Public Law 97-25, July arranger of credit as a person who
27, 1981) exempts cash discounts regularly arranges for the extension
from disclosure as finance charges of consumer credit by another perunder the Truth in Lending Act when son if (1) a finance charge may be
such discounts are offered to custom- imposed for that credit, or the credit
ers who pay cash instead of charg- is payable by written agreement in
ing a purchase on a credit card or on more than four installments (not inan open-end credit account. Sec- cluding a downpayment); and (2)
tion 201 of the Cash Discount Act the person extending the credit is not
reimposes the prohibition against a creditor. Because of an increase
surcharges on credit card use until in seller-financed mortgage loans and
February 27, 1984.
because of the importance of conThe Higher Education Act (Pub- sumer disclosures in such transaclic Law 97-35, August 13, 1981) tions, the Board proposed on Octoprovides that lenders charging a 5 per- ber 23 an amendment to the new
cent origination fee on student loans regulation (46 F.R. 51920). The
should not consider the fee in calcu- amendments would cover most mortlating the annual percentage rate of gage loan brokers who arrange sellerthe loan and in making other truth in financed transactions. It would clarify
lending disclosures (section 536(a) the meaning of the term "arrange."
(4)). These changes are reflected in Persons would be subject to Regularevisions to the commentary on Reg- tion Z if they develop or negotiate
ulation Z.
credit terms, and if they help to comSection 301 of Title III of the Inter- plete credit documents, including
national Banking Facility Deposit In- sales contracts that spell out the
surance Act postpones for six months, terms upon which the seller agrees to
until October 1, 1982, the effective provide financing to the buyer.
date of most of the provisions of the
The Board requested comment on
Truth in Lending Simplification and the proposal by December 7, 1981.
Reform Act.
The proposal was pending at yearOther legislation that may affect end.



Consumer and Community Affairs
Legislative Recommendations
The Office of the Comptroller of the
Currency has questioned whether all
the disclosures required by the Truth
in Lending Act and by Regulation Z
are necessary. The OCC believes that
the essential disclosures in closed-end
transactions are the amount financed,
the finance charge, the annual percentage rate, the schedule of payments, information on assumptions,
and the cost of credit life insurance.
The OCC suggested that these disclosures remain mandatory and that
consumers be referred to other debt
or loan documents for other costs and
terms of credit. As an alternative,
the OCC suggested that the disclosure
of other information be made optional, and be made available to the
consumer upon request.
The OCC also proposed the integration of the Electronic Fund Transfer and Truth in Lending Acts so that
a single ceiling is placed on consumer
liability for unauthorized use of access devices and credit cards. The
OCC recommends that the amount
of liability be "at a higher level than
$50.00."
Equal Credit Opportunity
This fifth annual report on the Equal
Credit Opportunity Act (ECOA) discusses the uniform enforcement policy
that was developed by the Federal
Financial Institutions Examination
Council. That policy was designed
to ensure corrective action by financial institutions whose practices violate the intent of the Equal Credit
Opportunity and Fair Housing Acts.
The report also discusses compliance,
rulewriting, and the activities of the
Consumer Advisory Council.



153

Uniform Enforcement Policies
On August 10, 1981, the Federal
Financial Institutions Examination
Council6 proposed a policy statement
for enforcement of the Equal Credit
Opportunity and Fair Housing Acts.
The objective of the statement is to
establish a uniform national policy
to require creditors to take corrective
action for the more serious past violations, and to ensure future compliance. The policy statement was
adopted by the Federal Reserve
Board, the Federal Deposit Insurance
Corporation (FDIC), the Office of
the Comptroller of the Currency
(OCC), and the National Credit
Union Administration (NCUA) (46
F.R. 56500, November 17, 1981).
The policy statement emphasizes
that the agencies will enforce the
acts vigorously, and states that institutions will be required to establish
procedures to prevent repetition of
certain violations that the policy identifies as serious. The policy applies to
violations that are discovered after
its adoption; when a serious violation is discovered, the creditor is
usually required to correct all similar
violations that occurred in the 24
months before the discovery of the
violation.
The serious violations identified
are discouraging applicants on a prohibited basis, using credit criteria in
a discriminatory manner in evaluating applications, imposing more
onerous terms and requiring cosigners on a prohibited basis, failing
to provide notice of adverse action,
and failing to report separate credit
histories for married persons.
6. See footnote 5 for composition of the
Examination Council.

154

Consumer and Community Affairs

To implement the policy statement,
the Examination Council also proposed a Supervisory Enforcement
Policy for the Equal Credit Opportunity and Fair Housing Acts. The
enforcement policy, which has been
adopted by the Board, the OCC, and
the NCUA, recommends specific
measures to correct serious violations.
For example, creditors that have discriminated illegally are required to
take the following steps:
• Identify all applicants who suffered illegal discrimination in the previous 24 months.
• Solicit new applications from
them and allow 60 days for reapplication.
• Describe to the affected applicants the conditions for any refunds
or reimbursements.
• Notify any party informed of a
rejection that the applicant's credit
history should be corrected.
• Evaluate the new application
using the original credit standards,
without any discriminatory elements.

8 percent; the FHLBB, 11 percent;
and the OCC, 20 percent. The NCUA
reported a 16 percent decrease in
compliance, which it attributes to the
examination techniques of its new
consumer compliance program.
The Board issued two cease-anddesist orders that addressed equal
credit opportunity matters, and the
FDIC issued one.
The most common violations cited
by the agencies were failures (1) to
give or to complete properly written
notices of adverse action; (2) to follow the requirements about the timing of adverse action notices; (3) to
provide the required disclosures regarding "other income" and marital
status; (4) to observe the provisions
prohibiting spousal signatures; and
(5) to retain for the required time
period evidence of compliance with
the act and Regulation B.

Other Agencies
The Civil Aeronautics Board (CAB)
reported a satisfactory level of compliance among U.S. and foreign airlines in 1981; it received fewer comCompliance
plaints than in 1980, and none
Federal Financial Institutions
required any formal enforcement acRegulatory Agencies
tion. The CAB provided consumers
The Board, the FDIC, the Federal interested in the ECOA with teleHome Loan Bank Board (FHLBB), phone information and with approand the OCC reported that com- priate government publications.
pliance continued to improve in 1981.
The Farm Credit Administration
More than half (51 percent) of the (FCA) reported continued good
examined institutions were found to compliance. The complaints received
be in full compliance with Regula- in 1981 did not suggest any distion B. Only 20 percent of the criminatory patterns or practices.
examined institutions that were not
The Federal Trade Commission
in full compliance had violated more (FTC) reported an apparent imthan five provisions. (The regulation provement in compliance. However,
contains about 170 provisions that it mentioned that certain requirecould be violated.) The Board re- ments continue to be violated: the
ported a 10 percent increase in over- prohibition against requiring spousal
all compliance from 1980; the FDIC, signatures; the use of possibly dis-




Consumer and Community Affairs
criminatory criteria such as ZIP
codes in credit-scoring systems; and
the use of vague, rather than specific, reasons for rejecting applications. The FTC is also concerned
that in both judgmental and creditscoring systems, some creditors may
disregard, or treat less favorably, income derived from sources other
than employment. The FTC is investigating whether these practices
have the effect of illegal discrimination against divorced or separated
women, elderly persons, and recipients of public assistance.
The Interstate Commerce Commission (ICC) explained in its report
that, of the regulated carriers, those
that transport household goods, and
thus deal with individuals rather than
business firms, would be most likely
to violate the ECOA. Nonetheless,
that agency said that it has never
received a complaint from a shipper
involving the discriminatory denial of
credit by such a carrier.
The Securities and Exchange Commission (SEC) reported substantial
compliance with the ECOA. It
brought no enforcement actions and
received no formal complaints.
The Small Business Administration (SBA) reported no enforcement
problems and good compliance. The
SBA's monitoring efforts were expanded in 1981 to include serviceoriented borrowers, such as doctors
and attorneys.
The U.S. Department of Agriculture reported substantial compliance
by creditors subject to the Packers
and Stockyards Act. No complaints
were received and no enforcement
actions were initiated.
None of the agencies, including
the Board, has legislative recommendations.



155

Consumer Advisory Council
The Consumer Advisory Council was
established in 1976 to advise the
Board in carrying out its responsibilities under the Consumer Credit
Protection Act and in other consumer-related activities. The council
has 30 members who represent the
interests of consumers and creditors
from different regions of the country.
With regard to equal credit legislation, council members discussed
ways to improve the detection of
ECOA violations, including the development and use by creditors of
written loan policies. The council
also discussed the extent to which
past violations of the act should be
considered under the enforcement
policy developed by the Examination
Council and the ways creditors
should be required to remedy the
violations, and the advantages and
disadvantages to consumers and creditors of judgmental and numerical
credit-scoring systems.
Rulewriting
In 1981, the Board continued to
analyze various issues related to two
proposed regulatory interpretations
(45 F.R. 56818) and two proposed
amendments to Regulation B (43
F.R. 49987). The Board expects to
take final action on the proposals in
early 1982.
One proposed interpretation concerns the consideration of income by
creditors. The second is related to
the way a creditor that uses a creditscoring system should select and disclose the principal reasons for denying
credit.
The first proposed amendment relates to the business-credit exemption from recordkeeping and noti-

156

Consumer and Community Affairs

fication requirements and would
modify the rules for business loans
under $100,000. The other proposed amendment would have the
effect of making all business-credit
transactions subject to the prohibition against requesting information
on marital status. Under the current regulation, such transactions are
exempt from that prohibition.

Home Mortgage Disclosure
The Board of Governors of the Federal Reserve System implements the
Home Mortgage Disclosure Act of
1975 (HMDA) through its Regulation C (Home Mortgage Disclosure).
The act, which requires financial institutions that have assets of more
than $10 million and offices in standard metropolitan statistical areas
(SMSAs) to disclose publicly the
location of their residential mortgage
loans, was reenacted with certain
amendments on October 8, 1980.
On February 10, the Board published a proposed version of Regulation C (46 F.R. 11780). After
analyzing about 225 comments that it
had received, the Board adopted, on
July 31, a revised and simplified version of the regulation (46 F.R.
40679). Most of the provisions were
effective upon adoption. In keeping
with the purposes of the Board's
Regulatory Improvement Project, the
revised regulation is nearly a third
shorter than the earlier version, and its
language is simpler and more concise.
The principal revisions to the regulation (1) require depository institutions to use a standard format prescribed by the Federal Reserve Board
to disclose the required information,
and to submit copies of their home



mortgage disclosure statement to their
primary federal regulatory agency;
(2) require covered institutions to
display a notice in their lobby about
the availability of information on the
institution's mortgage lending; (3)
permit the use of either 1970 or 1980
census tracts as a basis for reporting,
pending full availability of 1980 census tract maps from the Bureau of
the Census; (4) require itemization
of data by census tract and county
(rather than by census tract and ZIP
code); (5) permit most institutions
that have lost an exemption held on
grounds of size or location to begin
compiling data for the year following
the year of the loss (rather than for
the year preceding it); (6) require
disclosure of conventional loans and
of loans such as Federal Housing
Administration, Farmers Home Administration, and Veterans Administration loans, but not (as previously
required) the sum of the conventional
and other types of loans; (7) avoid
duplicate reporting of loans by a
branch and a head office of a lending
institution located in the same SMSA;
and (8) limit reporting by branch
offices to data on loans made on
property in the SMSA where the
branch is located.
In keeping with the statutory mandate, the Board has issued a revised
HMDA-1 form to be used for disclosure and reporting purposes by all
institutions subject to Regulation C.
The form was reviewed and approved
by the Office of Management and
Budget, as required under the Paperwork Reduction Act (Public Law
96-511).
Finally, a statutory amendment to
the act provides for a system of central data repositories in each SMSA
and also for the annual aggregation

Consumer and Community Affairs
of mortgage loan data to cover all
institutions in each SMSA.
Federal Trade Commission Act
Under section 18 (f) of the Federal
Trade Commission Act, the Board of
Governors of the Federal Reserve
System has certain responsibilities:
(1) to identify unfair or deceptive
banking practices and to adopt regulations prohibiting them; (2) to take
appropriate action on complaints
against state member banks; and
(3) within 60 days of the effective
date of certain rules prescribed by the
Federal Trade Commission, to promulgate regulations for banks that are
substantially similar, unless the Board
finds (a) that the acts or practices
covered by the rule are not unfair or
deceptive with regard to banks, or
(b) that the implementation of similar rules with respect to banks would
seriously conflict with essential monetary policies or payments system
policies of the Board.
Consumer Complaints
In 1981, the Federal Reserve System
received 3,913 complaints: 2,113 by
mail, 1,754 by telephone, and 46 in
person (table 1). The total number
received represents a 12 percent decrease from 1980.
In responding to consumer complaints and inquiries, the staff provided specific explanations about
consumer credit laws, as well as bank
policies and practices. Members of
the System's staffs investigated 1,290
complaints against state member
banks and referred those about creditors or businesses not under the
Board's supervision to the appropriate
enforcement agencies. The System's
procedures require Reserve Banks to



157

1. Consumer Complaints Received by
the Federal Reserve System, by
Subject, 1981
Subject
Regulation B (Equal Credit
Opportunity)
Regulation C (Home Mortgage
Disclosure)
Regulation E (Electronic Fund
Transfers)
Regulation Q (Interest on Deposits)
Regulation X (Securities Credit) —
Regulation Z (Truth In Lending) ...
Regulation BB (Community
Reinvestment)
Regulation CC (Consumer Credit
Restraint)

Number
696
6
66
291
1
623
4

1
Fair Credit Reporting Act
Fair Debt Collection Practices Act .. • 129
64
Fair Housing Act
2
Transfer agents
35
Municipal securities dealer regulation
1
Unregulated bank practices
1,937
Other 1
57
Total
3,913
1. "Other" refers primarily to miscellaneous
complaints against business entities.

contact member banks and complainants during the course of an investigation. When necessary, System
examiners conduct investigations at
the member bank, especially when
discrimination appears to be involved.
Table 1 identifies, by subject, the
consumer complaints received by the
Federal Reserve System during 1981.
The Board's Division of Consumer
and Community Affairs is continuing
to assist the Reserve Banks in handling consumer complaints. Members
of the Board's staff regularly review a
sample of the correspondence that
involves complaints resolved by the
Reserve Banks and evaluate the actions of the Banks for adherence to
System procedures and guidelines.
The results of the review are then
discussed with the pertinent Bank.
In keeping with its practices, the
Board sent follow-up questionnaires
to consumers whose complaints against
state member banks were handled by

158

Consumer and Community Affairs
able; 74 percent, that they were satisfied with the promptness in handling;
90 percent, that they were treated
courteously by Federal Reserve staff;
83 percent, that they would contact
the Federal Reserve again if they had
other problems with banks; and 52
percent, that the resolutions of their
complaints were acceptable. The proportion of those satisfied with the outcome is relatively lower than the
proportion of those satisfied with the
System's handling of the complaints

the System. The questionnaires asked
whether the complainants were satisfied with the way the System handled
their complaints and requested suggestions for improvement. In 1981,
consumers returned 89 precent of
these questionnaires, a dramatic increase over previous years: in 1980,
the return rate was 60 percent; and
in 1979, it was 67 percent. Approximately 75 percent of the respondents
reported that the explanations received were clear and understand-

2. Consumer Complaints Received by x Federal Reserve System,
the
by Function and Resolution, 1981
Type of complaint
Type of resolution

Total complaints
Total concerning state
member banks
Insufficient information ..
Information furnished —
Bank legally correct
No accommodation —
Accommodation made •
Clerical error, corrected ..
Factual dispute
Bank violation, resolved ..
Possible bank violation,
unresolved
Customer error
Pending
December 31, 1981

Total
complaints

Loan functions

Electronic
Deposit fund
Trust
functions trans- services Other
fers

Discrimination

Other

3,913

380

1,534

1,257

71

46

625

1,290
87
251

217
16
42

488
19
116

349
18
68

30
1
4

27
1
10

179
32
11

398
145
125
32
20

81
25
13
1
3

145
64
50
6
6

96
38
41
16
8

10
4
5
0
0

9
1
0
1
0

57
13
16
8
3

11
12

0
1

2
2

3
5

0

209

35

78

56

5

1. The terms used in this table that are not
self-explanatory are defined as follows:
Insufficient information. The staff has been
unable, after follow-up correspondence with
the consumer, to obtain sufficient information
to process the complaint.
Information furnished. When it is apparent
that the complainant does not understand the
law and that there has been no violation on
the part of the bank, the Federal Reserve System explains the law in question and provides
the complainant with other pertinent information.
Bank legally correct, accommodation made.
In these cases the bank appears to be legally
correct but chooses to make an accommodation.
Factual dispute. These cases involve factual



1

0
4

1

4
4
31

disputes not resolvable by the Federal Reserve
System and contractual disputes that can be
resolved only by the courts. Consumers wishing to pursue the matter are advised to seek
legal counsel or legal aid, or to use small
claims courts.
Bank violation, resolved. In these cases a
bank appears to have violated a law or regulation and has taken corrective measures
voluntarily or as ordered by the Federal Reserve System.
Possible bank violation, unresolved. When
a bank appears to have violated a law or
regulation, customers are advised to seek civil
remedy through the courts. Cases that appear
to involve criminal irregularity are referred
to the appropriate law enforcement agency.

Consumer and Community Affairs
because a number of the complaints
involved practices that, although objectionable to, or not understood by
consumers, are permissible banking
practices.
Table 2 summarizes the nature and
resolution of the complaints against
state member banks in 1981. The
complaints are classified according to
bank functions: loans, deposits, electronic fund transfers, trust services,
and other. About 41 percent concerned loan functions: 18 percent
alleged discrimination on a prohibited
basis, and 23 percent dealt with credit
denial on a nonprohibited basis (such
as length of residency), disclosures of
credit costs, and other general loan
functions. Approximately 32 percent
involved interest on deposits and general practices concerning deposit
accounts.
Identification of
Unregulated Practices
The Board monitors complaints about
banking practices that are not subject
to existing regulation to focus on
those that may be unfair or deceptive.
In 1981, complaints about such unregulated practices received by the
System totaled 1,937, 13 percent
fewer than in 1980.
The Board identified categories in
which there were 15 or more complaints per quarter, or 50 annually,
about any unregulated practice. Of
the 1,937 complaints, 915 fell into
such categories: complaints about
disputed deposits (156, or 8 percent
of the total complaints about unregulated practices); discrepancies in
accounts (151, or 8 percent); charges
and procedures concerning insufficient
funds (105, or 5 percent); excessive
service charges (85, or 4 percent);
debt-collection tactics (85, or 4 per-




159

cent); the release of funds from
accounts (76, or 4 percent); excessive time to clear checks (75, or 4
percent); refusals to cash checks (70,
or 4 percent); rude bank personnel
(60, or 3 percent); and wire transfers
(52, or 3 percent).
The two categories of complaints
that ranked highest in the number
received (disputed deposits and discrepancies in accounts) involve factual disputes between the consumer
and the bank in which no faulty practice is clearly indicated. Moreover,
each of these "high ranking" categories represents only a small fraction
(4 percent or less) of all consumer
complaints received.
The Board periodically reviews
major complaint categories to determine whether they reflect a pattern
of unfair or deceptive practices that
should be prohibited by regulation.
In 1981, the Board did not detect any
such pattern.
Rule Writing and the
Federal Trade Commission
The Board continues to monitor the
status of three trade regulation rules
proposed by the FTC to determine
the need for substantially similar rules
applicable to banks. In August 1981,
the FTC adopted in final form the
"Used Car Rule," which requires certain disclosures by automobile dealers
engaged in the sale of used motor
vehicles. In September, the Commission submitted the rule to the
Congress for review pursuant to the
legislative-veto provisions of the act.
The Congress did not veto the rule,
but 90 days of continuous legislative
session did not pass before adjournment. As a result, in January 1982,
the Commission resubmitted the rule
to the new session of the Congress,

160

Consumer and Community Affairs

which is also entitled to a 90-day
period. If the rule is not vetoed, it
will become effective six months following expiration of that period.
Board responsibilities, if any, would
arise at that time.
The proposed creditor amendment
of the Holder in Due Course Rule is
pending at the FTC. The seller portion of the rule has been in effect since
May 14, 1976; the amendment would
extend the requirements of the rule to
nonseller creditors. The purpose of
the rule, as described by the FTC, is
to ensure that no legal device interferes with a seller's duty to perform
its responsibilities when a consumer
has agreed to pay for goods.
The Board also continues to moni-




tor the status of the FTC's proposed
Credit Practices Rule. The rule would
prohibit certain contractual terms that
creditors have used when collecting
unpaid debts and would require creditors to make specific disclosures. The
proposal, which was first issued for
comment by the FTC in 1975, has
been modified to meet some of the
technical objections that were raised
during hearings held by the Commission in 1977 and 1978. On June 4,
1981, the FTC issued the summary of
comments received in the post-record
comment period on the Presiding
Officer's Report and the Final Report
of the Staff on the proposed rule. The
rule has not yet been issued in final
form by the FTC.

161

Legislative Recommendations
The Board of Governors has made
the following recommendations for
legislation to the Congress of the
United States.
Reserve Requirements on
Money Market Mutual Funds
The Board has recommended that the
Congress amend the Monetary Control Act of 1980 to authorize the Federal Reserve to impose reserve requirements on money market mutual
funds that can be used for third-party
payment or transaction purposes.
The Monetary Control Act extended reserve requirements on transaction balances to all depository
institutions to improve the Federal
Reserve's ability to control the money
supply. However, the rapid growth
of money market mutual funds since
passage of the act has had strong
implications for the competitive positions of depository institutions and
could result in serious complications
for the conduct of monetary policy.
Imposition of reserve requirements
on those funds that can serve as
transaction accounts is consistent with
the premise of the Monetary Control
Act and would remove an artificial
incentive favoring money market
funds over traditional depository institutions.
Exemption of Smaller Institutions
from Reserve Requirements
The Board has recommended that the
Congress amend the Monetary Control Act to exempt depository institutions with less than $5 million in
deposits from reserve requirements.



The proposed amendment would relieve the reserve burdens on smaller
depository institutions without significantly affecting the Federal Reserve's
ability to conduct monetary policy.
Another approach would be to exempt from reserve requirements the
first $2 million of deposits of all
depository institutions.
Helping Regulatory Agencies
to Deal with
Ailing Depository Institutions
The Board has recommended that the
Congress give the federal financial
regulatory agencies greater authority
to deal with the unusual financial
pressures that many depository institutions now face. The legislation aims
at (1) increasedflexibilityin administering federal deposit insurance funds,
(2) transitional assistance to thrift
institutions during a period of financial stress, and (3) broadened merger
possibilities, designed to minimize the
cost impact on the federal insurance
funds, while assisting the maximum
number of institutions.
The proposal (1) would permit the
Federal Deposit Insurance Corporation to provide assistance when severe financial conditions threatened
the stability of a significant number
of insured institutions, provided that
such assistance would avert or substantially reduce the risk of loss to
the insurance fund; (2) would expand the powers to facilitate conversion of mutual organizations to stock
form to make mergers with stock
organizations easier, and as a last
resort, would permit acquisition of

162

Legislative Recommendations

thrift institutions by healthy out-ofstate thrift institutions or bank holding companies; and (3) would provide
limited power for the FDIC to arrange
an interstate merger of a large failing
commercial bank when an intrastate
merger would be neither possible nor
desirable.

to permit the financial regulatory
agencies to set a limit that is based
on economic conditions at the time;
and (2) to modify the requirement
that a majority of the board of directors give prior approval for loans
totaling more than $25,000 to executive officers and other insiders. The
suggested amendment would provide
a flexible loan limit that could be
Amendments to the Financial
adjusted periodically as economic
Institutions Regulatory and
conditions change; it would also perInterest Rate Control Act of 1978
mit the board of directors to delegate
The Board has recommended amend- the authority to approve such loans
ments to the Financial Institutions to a loan committee or an executive
Regulatory and Interest Rate Control committee of board members, thereby
Act of 1978 (FIRA) to ease re- simplifying the present cumbersome
quirements that are unnecessarily procedure.
burdensome, to correct procedural
• Amendment of section 22 (h) of
problems, and to contribute to the the Federal Reserve Act to permit a
efficient enforcement of the act. The member bank to pay an overdraft on
Board's recommendations for 1981 an executive officer's or director's accomprise the following major ele- count at such bank. This amendment
ments:
would place insiders on an equal foot• Elimination of the maximum ing with other bank customers who
amount in section 22 (g) of the Fed- already have overdraft privileges.
• Amendment of section 106(b)
eral Reserve Act on a member bank's
loans to its executive officers for the of the Bank Holding Company Act to
purchase of a home or education of eliminate the reporting by banks of
children, and replacement of the loans they make to insiders at banks
$10,000 limit on other kinds of loans with which they maintain a correwith authority for thefinancialregula- spondent relationship. This requiretory agencies to set an appropriate ment is not justified by its limited
limit based on prevailing economic benefits to the supervisory authorities.
conditions.
• Amendment of section 106 (b)
• Elimination of the requirement
contained in section 22 (g) of the of the Bank Holding Company Act to
Federal Reserve Act that a member extend the prohibitions against prefbank file a quarterly report on loans erential loans to individual executive
to its executive officers. This require- officers, directors, and principal
ment duplicates the annual reporting shareholders of banks that maintain
correspondent balances with the lendprovisions of FIRA.
• Amendment of section 22 (h) of ing bank to related interests of such
the Federal Reserve Act (1) to re- individuals. The amendment would
move the $25,000 limit above which close an apparent loophole in the
loans to executive officers and other law.
• Deletion of section 7(k) of the
insiders must be approved by a
Federal Deposit Insurance Act, which
Digitizedmajority of the board of directors and
for FRASER


Legislative Recommendations
requires annual disclosure of a bank's
principal shareholders and of extensions of credit by the bank or its
correspondents to those shareholders
and to executive officers of the bank.
Review of insider loans is a routine
practice at all examinations, and the
costs of preparing this report are not
justified by the benefits for supervision and public disclosure.
Financial Transact ions
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 financial transactions between these banks and affiliated companies. The Board's review
of this statute was prompted in part
by the discovery that several 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 caused substantial instability in the banking system. At the
same time, the Board finds some flaws
in 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.
To correct these flaws, the Board
has recommended amendments to
section 23A: (1) to allow a holding
company greater freedom to transfer
funds among its sister subsidiary banks
but to prohibit a bank from purchasing low-quality assets from a sister
subsidiary bank; (2) to broaden the
definition of affiliate to include real
estate investment trusts and other
Digitizedfinancial organizations that are sponfor FRASER


163

sored 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.
Expansion oi" Class i' 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
five. The proposal aims to diversify
further the backgrounds and interests
represented on the Reserve Banks'
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 the Reserve
Banks.
Amendments to the
International Banking Act
The International Banking Act of
1978 (IBA) required the Board to
report to the House and Senate
Banking Committees within two years
of the date of enactment its recommendations to improve the implementation of the act. The act
provides a federal regulatory framework governing the operations of
foreign banks within the United
States and also contains statutory
provisions for the organization and
operations of Edge corporations. The
Board has submitted its report to the
Congress recommending that the act
be amended as follows:
• To authorize access for Edge
corporations to the Federal Reserve

164

Legislative Recommendations

discount window without requiring
them to become members of the Federal Reserve System.
• To authorize the Board to permit
majority ownership of Edge corporations by a U.S. bank that is controlled
by foreign individuals.
• To eliminate the statutory limitation on member-bank investments
in Edge corporations and authorize
the Board to control aggregate and
individual investments in Edge corporations.
• To authorize the Board to impose reserve requirements on all
foreign banking institutions in the
United States, including commercial
lending companies and agencies of
foreign banks with consolidated
worldwide assets of less than $1
billion.
• To amend the Bank Holding
Company Act so as effectively to
prohibit bank holding companies
from acquiring by merger banks outside their principal state of banking
operations, and to clarify the intent




of the Congress under section 5 of the
IBA with respect to a change in home
state.
• To clarify the provisions of section 2(h) of the Bank Holding Company Act, as amended by the IBA,
(1) to assure that the requirements
for U.S. nonbanking activities are
applicable to direct offices as well as
to subsidiaries, and (2) to assure that
foreign banking organizations cannot
conduct U.S. financial operations of
the kinds not permissible for domestic
bank holding companies.
• To permit the banking agencies
to afford confidential treatment to
information obtained from foreign
banking organizations that is not disclosed, either by law or by custom, in
their home countries.
• To authorize the banking agencies to exchange examination and
other supervisory information with
foreign banking authorities about
banks and bank holding companies
under suitable agreements to maintain
confidentiality of that information.

165

Litigation
During 1981, the Board of Governors was named in forty-three lawsuits, compared with thirty-three in
1980. Of the actions filed in 1981,
five raised questions under the Bank
Holding Company Act, compared
with nine in 1980. As of December 31,
1981, fourteen cases were pending,
two of which involve the Bank Holding Company Act. A brief description of each of these cases and of
those disposed of in 1981 follows.
Bank Holding Companies—
Antitrust Action
In 1981, 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 to bank mergers
that had been approved previously
by the Board, and no such cases are
pending from previous years.
Bank Holding Companies—
Review of Board Actions
In Investment Company Institute v.
Board of Governors, No. 77—1862
(D.C. Circuit, filed September 23,
1977), petitioner sought judicial review of a Board order, dated August 31, 1977 {Federal Reserve Bulletin, volume 63, September 1977,
page 856); that order denied 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). Citing the Glass-Steagall
Act, petitioner challenged the validity
of the Board's amendment, which per


mits bank holding companies to act as
investment advisers to, or sponsors of,
an investment company that is registered under the Investment Company
Act of 1940. On March 30, 1979,
the court overturned the Board's
amendment (606 F.2d 1004). The
Board applied for and was granted
certiorari by the U.S. Supreme Court
on February 19, 1980 (444 U.S.
1070).
On February 24, 1981, the Supreme Court overturned the decision
of the court of appeals. It decided that
bank holding companies could act as
investment advisers to closed-end investment companies without violating
the Glass-Steagall Act and that such
services were closely related to banking under the Bank Holding Company Act (450 U.S. 46).
In Security Bancorp et al. v. Board
of Governors, Nos. 78-1581 and 7 8 2031 (9th Circuit, filed March 17
and May 12, 1978), petitioners challenged the Board's denial of 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). On October 27,
1980, the court of appeals issued an
opinion ordering the Board to approve the application (655 F.2d 164),
and on April 10, 1981, denied a motion by the Board to vacate the
judgment because of mootness (id.).
On December 14, 1981, the Supreme
Court granted the Board's petition for
certiorari, vacated the opinion of the
court of appeals as moot, and re-

166

Litigation

manded the case to the Board with
instructions to vacate its order as
moot.
In County National Bancorporation
et al. v. Board of Governors, No. 791783 (8th Circuit, filed September 18,
1979), petitioners challenged the
Board's order of August 27, 1979
(Federal Reserve Bulletin, volume 65,
September 1979, page 763), denying
petitioners' application to acquire TG
Bancshares Co., St. Louis, Missouri,
a multibank holding company.
On September 3, 1980, the court
held that the Board could not deny
approval of an application to acquire
a bank under section 3 of the Bank
Holding Company Act for anticompetitive effects unless those effects
amounted to a violation of the antitrust laws. The Board was granted
a rehearing en bane on October 10,
1980. On July 31, 1981, the court
en bane agreed with the earlier panel
decision, vacated the original Board
order, and remanded the case to the
Board to reconsider the application
de novo (645 F.2d 1253).
In Mercantile Texas Corporation v.
Board of Governors,No. 80-1528 (5th
Circuit, filed May 15, 1980), petitioner requested that the court review
a Board order (Federal Reserve Bulletin, volume 66, May 1980, page 423)
denying petitioner's application to
acquire PanNational Group, Inc., El
Paso, Texas. On February 25, 1981,
the court vacated the Board's order,
and on July 10, 1981, remanded the
case to the Board for reconsideration
(638 F.2d 1255). The court held that
the Board had no authority to deny
petitioner's application on the grounds
of anticompetitive effects unless the
effects amounted to a violation of the
antitrust laws. The court held that
the Board had not made sufficient



findings to show that a violation of
the antitrust laws would occur if the
application were approved.
In Republic of Texas Corp. v.
Board of Governors, No. 80-1985
(5th Circuit, filed September 11,
1980), petitioner challenged a Board
order of August 20, 1980 (Federal
Reserve Bulletin, volume 66, September 1980, page 787), denying petitioner's application to acquire the
Citizens National Bank of Waco,
Waco, Texas. Petitioner claimed that
the application should be granted by
operation of law because of the
Board's alleged failure to act within
91 days of receipt of the application.
Petitioner also claimed that the
Board's order was not supported by
substantial evidence. On June 24,
1981, the court of appeals vacated the
Board's order, and on July 16, 1981,
it remanded Republic's petition to the
Board for reconsideration (649 F.2d
1026). The court held that the Board
had acted in a timely fashion under
the Bank Holding Company Act but
that the Board'sfindingswere not sufficient to support a denial based on a
violation of the antitrust laws.
In Independent Insurance Agents
of America, Inc., and Independent
Insurance Agents of Virginia v. Board
of Governors, No. 80-1611 (4th Circuit, filed September 15, 1980), petitioners sought review of a Board order
dated July 24, 1980 (Federal Reserve
Bulletin, volume 66, August 1980,
page 668), approving the application
of Virginia National Bancshares,
Inc., Norfolk, Virginia, to engage in
the sale of credit-related property
and casualty insurance. Petitioners
claimed that the Board's action was
not supported by substantial evidence
and that approval could not reasonably be expected to produce benefits

Litigation
to the public that outweigh the adverse effects. Petitioners also claimed
that the Board's denial of their request
for a hearing was unlawful. On
April 29, 1981, the court of appeals
affirmed the Board's order, holding
that there was substantial evidence of
benefits to the public and that no
hearing was necessary because no
material facts were in dispute (646
F.2d 868).
In Independent Insurance Agents
of America, Inc., and Independent
Insurance Agents of Missouri v. Board
of Governors, No. 80-1879 (8th Circuit, filed September 19, 1980), petitioners sought review of a Board order
dated August 22, 1980 {Federal Reserve Bulletin, volume 66, September
1980, page 799), approving the application of Mercantile Bancorporation,
St. Louis, Missouri, to engage in the sale
of credit-related property and casualty
insurance. Petitioners claimed that
the Board should have held a formal
hearing on the application to determine whether approval could reasonably be expected to produce benefits
to the public that outweigh the adverse effects. On September 1, 1981,
the court of appeals vacated the
Board order and remanded the case to
the Board for a formal evidentiary
hearing (658 F.2d 571). The court
held that there were unresolved issues
of material fact regarding the application that necessitated a formal hearing. On November 16, 1981, the
court denied the Board's petition for
a rehearing en bane (664 F.2d 177).
In Martin-Trigona v. Board of
Governors,No. 80-1739 (D.C. Circuit,
filed July 2, 1980), petitioner challenged a Board order of June 3, 1980
(Federal Reserve Bulletin, volume 66,
July 1980, page 587), approving an
application by Citicorp to retain Citi


167

corp Homeowners, Inc., Des Peres,
Missouri. On March 3, 1981, the
court granted the Board's motion to
dismiss the case.
In Wilshire Oil Company of Texas
v. Board of Governors, No. 80-2568
(D.C. Circuit, filed December 24,
1980), petitioner sought judicial review of a Board determination dated
November 17, 1980, that petitioner
continued to be a company subject to
the Bank Holding Company Act notwithstanding that petitioner's subsidiary bank, Trust Company of New
Jersey, reserved the right to require
14 days' advance notice of withdrawal
from its demand deposit accounts.
Petitioner also brought an action in
the U.S. District Court for the District
of New Jersey for declaratory and
injunctive relief against an enforcement proceeding arising out of the
Board's determination (Wilshire Oil
Company of Texas v. Board of Governors, et al., No. 80-4156, D.N.J.,
filed December 31, 1980.) These
cases were dismissed after an agreement between the parties.
Pursuant to this agreement, the
Board issued, on April 2, 1981, its
final order under the Bank Holding
Company Act and the Financial Institutions Supervisory Act, in which the
Board determined that petitioner continued to be subject to the Bank Holding Company Act. Petitioner sought
review of that order in the U.S. Court
of Appeals for the Third Circuit. On
December 31, 1981, the court of
appeals affirmed the Board's order.
(Wilshire Oil Company of Texas v.
Board of Governors, No. 81-1560,
3rd Cir., December 31, 1981). On
February 1,1982, the court of appeals
denied petitioner's petition for a rehearing en bane.
In Option Advisory Service, Inc. v.

168

Litigation

Board of Governors, No. 81-4023 (2d
Circuit, filed February 18, 1981),
petitioner challenged the Board's approval of the application of Citicorp,
New York, New York, to acquire
Citibank (South Dakota), N.A. On
June 5, 1981, the court of appeals
dismissed the case for lack of standing.
On December 28, 1981, the U.S.
Court of Appeals for the Second Circuit dismissed Option Advisory Service, Inc. v. Board of Governors, No.
81-4174 (2d Circuit, filed September
24, 1981), a petition to review the
Board's order approving the application of Midland Bank Ltd. to acquire
Crocker National Bank. On the same
day, the court of appeals dismissed
Option Advisory Service, Inc. v.
Board of Governors, No. 81-4176
(2d Circuit,filedSeptember 24,1981),
a petition to review the Board's order
approving the application of Credit
and Commerce America Holdings
N.V. to become a bank holding company. On January 26, 1982, the
court of appeals dismissed the petition
to review the order approving the
application of J.P. Morgan & Co. to
acquire a subsidiary in Delaware
(Option Advisory Service, Inc. v.
Board of Governors, No. 81-4248,
2d Circuit, filed December 18, 1981).

March 3, 1981, for plaintiff's failure
to prosecute.
In Merrill v. Federal Open Market
Committee et al, No. 75-0736
(D.D.C, filed May 8, 1975), plaintiff
brought suit under the Freedom of
Information Act to compel the Committee to disclose immediately upon
adoption its domestic policy directives
and the memoranda of discussion of
its meetings. Pursuant to 12 C.F.R.
271.5, the Committee routinely delays
release of the domestic policy directive
adopted at each meeting until shortly
after the next meeting, at which a new
directive is adopted. On March 9,
1976, the court ruled that the Committee's domestic policy directives
must be made available to the public
upon adoption and that nonexempt
portions of the memoranda of discussion that can be reasonably segregated
must also be disclosed to members of
the public upon request (413 F.
Supp. 494). The Committee appealed
the ruling on the domestic policy
directive to the U.S. Court of Appeals
for the District of Columbia. That
court, on November 10, 1977,
affirmed the ruling of the district court
(565 F.2d 778). The Board then
filed a petition for a writ of certiorari
with the U.S. Supreme Court.
On June 28, 1979, the Supreme
Other Litigation Involving
Court vacated the decision of the
Challenges to Board
court of appeals and remanded the
Procedures and Regulations
case to the district court for consideraIn a case related to the failure of the tion of whether immediate disclosure
United States National Bank, San of the Committee's domestic policy
Diego, California, Roberts Farms, directives would significantly harm
Inc. v. Comptroller of the Currency the U.S. government's monetary policy
et al, No. 75-0268 (S.D. Cal., filed functions or its commercial interests;
November 20, 1975), plaintiff sought if it would do so, the Committee's
damages on the grounds that the fed- present policy of delaying public diseral bank regulatory agencies negli- closure of each directive until a new
gently supervised the bank. This case directive is in force would be consiswas dismissed without prejudice on tent with the Freedom of Information



Litigation

169

Act (443 U.S. 340). On remand, the motion for summary judgment or to
two parties filed cross motions for dismiss, arguing that the statute does
summary judgment that were sup- not offend the appointments clause
ported by extensive affidavits and a and that, in any event, plaintiff lacks
stipulation covering most of the perti- standing to sue. On October 26, 1979,
nent facts. On June 9, 1981, the the court granted the Committee's modistrict court granted the Committee's tion to dismiss for lack of standing
motion for summary judgment (516 (84 F.R.D. 114). Plaintiff appealed to
the Court of Appeals for the District
F. Supp. 1028).
In Emch v. United States et al., of Columbia Circuit, and on June 24,
No. 77-C-677 (E.D. Wis., filed No- 1981, the court affirmed the lower
vember 18, 1977), plaintiff, a share- court's decision with regard to the
holder of the parent company of the issue on standing. On November 30,
American City Bank & Trust Co., 1981, the Supreme Court denied
N.A., Milwaukee, Wisconsin, a failed plaintiff's petition for a writ of cerbank, alleged that the Board and other tiorari (50 U.S.L.W. 3447).
bank regulatory agencies were negliIn Gregory et al. v. Board of Govgent in supervising and examining the ernors, No. 79-1787 (D.D.C., filed
bank. On May 8, 1979, the court July 27, 1979), plaintiffs sued under
dismissed the case without prejudice, the Freedom of Information Act,
and on August 15, 1979, it denied claiming that the Board had implaintiff's motion to file an amended properly withheld portions of a staff
complaint. Plaintiff appealed to the memorandum containing staff advice
U.S. Court of Appeals for the Seventh information from examination reports
Circuit, and on September 12, 1980, and confidential commercial informathe court of appeals affirmed the dis- tion that concerned the acquisition of
trict court order (630 F.2d 523). a failed bank in which plaintiffs were
Plaintiff's writ of certiorari to the shareholders. On March 3, 1980, the
Supreme Court was denied on March court partially granted and partially
2, 1981 (450 U.S. 966).
denied each of the cross motions for
In Riegle v. Federal Open Market summary judgment (496 F. Supp.
Committee et al, No. 79-1073 342). The court upheld the Board's
(D.D.C.,filedJuly 2, 1979), plaintiff, position respecting the confidentiality
a member of the U.S. Senate, sought of information derived from reports of
to enjoin the presidents and first vice examination and the confidentiality of
presidents of the Federal Reserve advice given to the Board by its staff.
Banks from serving as members of the The court, however, ordered discloFederal Open Market Committee and sure of certain information in the
to enjoin the Committee from permit- memorandum regarding a particular
ting such service. Plaintiff alleged commercial loan. The Board appealed
that the provision of the Federal the latter ruling to the U.S. Court of
Reserve Act governing appointment Appeals for the District of Columbia
of the Reserve Bank members of the Circuit (No. 80-1462). The case was
Federal Open Market Committee subsequently settled; and on March 2,
violates the Appointments Clause of 1981, pursuant to that settlement, the
the Constitution, Article II, Section 2, court of appeals remanded the case to
Clause 2. The Committee filed a the district court with instructions to



170

Litigation

vacate the portion of its order that motion for leave to file an amended
directed disclosure of commercial loan complaint after judgment. On Febinformation. On March 3, 1981, the ruary 24, 1981, the court denied the
district court vacated those portions motion and some of the requests for
as moot (515 F. Supp. 113).
attorneys' fees. Plaintiff filed a notice
In Gordon v. Board of Governors of appeal with the U.S. Court of
et al, No. C79-2052A (N.D. Ga., Appeals for the Fifth Circuit (Nos.
filed August 31, 1979), petitioner 81-7099 and 81-7277). On July 14,
challenged the action of the Board and 1981, the court of appeals dismissed
the Federal Reserve Bank of Atlanta both cases—No. 81-7099 from the
in declining to investigate plaintiff's December 2, 1980, order, and No.
allegation of fraud by two national 81-7277, resulting from the district
banks that acted as trustees for cer- court's denial of February 24, 1981,
tain real estate syndications in which of plaintiff's motion to file an amended
plaintiff apparently invested and lost complaint—as premature. After an
money.
evidentiary hearing, attorneys' fees
On June 19, 1980, the district court were awarded to one defendant on
dismissed plaintiff's petition for a writ September 25, 1981. Plaintiff then
of mandamus on lack of standing to appealed to the U.S. Court of Appeals
sue and denied a petition for rehear- for the Eleventh Circuit (No. 8 1 ing on July 18, 1980. The Fifth Cir- 8017) and defendants cross-appealed.
cuit Court of Appeals affirmed the The appeal is consolidated with the
lower court decision on April 28, appeal of No. 81-288A, and oral
1981 (645 F.2d 70), and denied a argument is expected in early 1982.
petition for rehearing on May 27,
In Gordon v. Board of Governors
1981. Plaintiff then filed a petition et al., No. C80-1362A (N.D. Ga.,
for certiorari with the U.S. Supreme filed August 18, 1980), plaintiff
Court (No. 81-553), which was sought treble damages from the Board
denied on November 9, 1981. A and three other defendants for alleged
petition for reconsideration was filed violations of RICO. On December 2,
on November 25, 1981, and denied 1980, the district court, referring to
on January 11, 1982.
reasons stated in another case (No.
In Gordon v. Heimann et al., No. C80-1265A, Gordon v. Heimann
C80-1265A (N.D. Ga., filed July 25, et al.) dismissed No. C80-1362A for
1980), plaintiff sought treble damages failure to state a claim upon which
from 43 defendants for alleged viola- relief could be granted. Plaintiff
tions of the Securities Act of 1933, filed a notice of appeal to the Fifth
the Securities Exchange Act of 1934, Circuit on January 2, 1981 (No.
and the Racketeer Influenced and 81-7067); the appeal was dismissed
Corrupt Organizations Act (RICO). as premature on July 14, 1981, and
On December 2, 1980, the court was not renewed.
dismissed the complaint because
In Gordon v. Heimann et al., No.
it failed to state a claim upon 81-288A (N.D. Ga., filed February
which relief could be granted. On 15, 1981), plaintiff seeks damages
December 11, 1980, several defen- from 44 defendants for alleged violadants filed for attorneys' fees. On tions of RICO. On May 28, 1981,
December 12, 1980, plaintiff filed a the court dismissed the complaint as



Litigation

171

being barred by res judicata and thus to modify or vacate the order of
plaintiff's complaint failed to state a June 11, 1975. On September 23,
claim upon which relief could be 1981, the court of appeals affirmed
granted. After an evidentiary hear- the lower court's decision and the
ing on July 13, 1981, the court in Board's decision not to modify the
its order of September 25, 1981, earlier order.
awarded attorneys' fees to all deIn Corbin v. United States, No.
fendants filing claims. Plaintiff's mo- 209-80C (Ct. Cl.,filedMay 5, 1980),
tion to vacate the judgment and the plaintiff sought damages as a result
award of attorneys' fees was denied. of actions of the Comptroller of the
On November 24, 1981, plaintiff Currency, the Federal Deposit Insurappealed the district court's order of ance Corporation, and the Federal
September 25, 1981, to the U.S. Reserve Bank of New York with
Court of Appeals for the Eleventh respect to the failure of Franklin NaCircuit (No. 81-8018); this appeal tional Bank. On October 8, 1980,
was consolidated with No. 81-8017. defendants filed a motion to dismiss
Several defendants cross-appealed the or for summary judgment. On August
denial of attorneys' fees in No. C80- 7, 1981, this case was dismissed per
1265A (Gordon v. Heimann et al.). curiam because of absence of no
Oral argument is expected in 1982. statutory grounds for plaintiff's reIn Crockett v. United States, quest for damages.
No. 80-310-CIV-5 (E.D.N.C, filed
In Berkovitz et al. v. Government
April 4, 1980), plaintiff sought to of Iran, No. C80-0097-WWS (N.D.
enjoin various aspects of the U.S. CaL, filed June 13, 1980), plaintiffs
government's fiscal and monetary brought suit against the government
policy. On April 8, 1981, the court of Iran for damages arising out of the
granted the government's motion to murder of Martin Berkovitz, a U.S.
dismiss.
citizen, and for imposition of a trust
In Roussel v. Comptroller of the with respect to any assets of the govCurrencyetal.,No. 80-1079 (D.D.C., ernment of Iran subject to the control
filed April 29, 1980), petitioner of the United States. In September
sought declaratory and injunctive 1981, the court entered a stipulated
relief against the Board's order of stay of all proceedings pending further
June 11, 1975, prohibiting petitioner order of the court.
from participating in any manner in
In Otero Savings & Loan Associathe conduct of the affairs of a national tion v. Board of Governors et al., No.
bank. On October 27, 1980, the dis- 80-K-1066 (D. Colo, filed August
trict court dismissed the case for lack 15, 1980), plaintiff sought declaraof jurisdiction. On November 21, tory and injunctive relief, alleging
1980, plaintiff filed a notice of appeal that defendants exceeded their auwith the U.S. Court of Appeals for thority and acted arbitrarily in refusthe District of Columbia Circuit (No. ing to process plaintiff's drafts through
80-2432). This appeal was consoli- the Federal Reserve clearing and coldated with Roussell v. Board of Gov- lection system. On August 15, 1980,
ernors, No. 81-1546 (D.C. Circuit, the district court issued a temporary
filed May 20, 1981), a petition for restraining order, and on September 3,
judicial review of a Board decision not 1980, issued a preliminary injunc


172

Litigation

tion. On November 13, 1981, the U.S.
Court of Appeals for the Tenth Circuit ruled that the preliminary injunction was properly granted (665 F.2d
275).
In A.G. Becker, Inc. v. Board of
Governors et al, No. 80-2175
(D.D.C., filed August 25, 1980),
plaintiff seeks declaratory and injunctive relief, pursuant to the Government in the Sunshine Act, against the
Board for failing to allow the public
to attend meetings at which the Board
considered a petition filed by plaintiff.
In an opinion dated November 26,
1980, the court granted in substantial
part the Board's motion for summary
judgment, holding that the Board had
acted properly in closing the meetings
to the public but had failed to provide
public notice of meetings at the earliest practicable time (502 F. Supp.
378). Plaintiff's appeal is pending
(No. 81-1493).
In A.G. Becker Inc. v. Board of
Governors et al, No. 80-2614
(D.D.C., filed October 14, 1980),
and Securities Industry Association
v. Board of Governors et al., No.
80-2730 (D.D.C., filed October 24,
1980), plaintiffs seek review of a
Board statement, dated September 26,
1980, denying in part plaintiffs' petition that the Board prohibit Bankers
Trust Company, a state member
bank, from selling third-party commercial paper as an agent of the issuer. On July 28, 1981, the district
court invalidated the Board's statement (519 F. Supp. 602); the Board's
appeals from the court's ruling (Nos.
81-2070 and 81-2058) are pending.
Plaintiffs also filed petitions for review of the Board's statement in the
Court of Appeals for the District of
Columbia Circuit (No. 80-2258,
filed October 14, 1980, and No. 80


2314, filed October 24, 1980). The
petitions for review have been consolidated with the Board's appeals
from the district court ruling.
In Nebraska Bankers Association
v. Board of Governors et al., No.
80-L-257 (D. Neb., filed September 25, 1980), plaintiff sought action
for declaratory and injunctive relief
against defendants'
enforcement
policy, contained in a policy guide,
with respect to reimbursable violations of the Truth in Lending Act
and Regulation Z. On July 22, 1981,
the court dismissed this case because
of the plaintiff's failure to exhaust
administrative remedies.
In 9 to 5 Organization for Women
Office Workers v. Board of Governors, No. 80-2905-C (D. Mass., filed
December 30, 1980), plaintiff sued
under the Freedom of Information
Act, claiming that the Board unlawfully withheld documents containing
information regarding a wage survey
conducted by a consortium of employers in Massachusetts. On December 21, 1981, the district court
granted summary judgment for the
Board with regard to certain of its
claims of exemption. The court
ordered that other documents be subject to in camera inspection and held
that a genuine issue of material fact
still existed with regard to the remaining documents. On December 28,
1981, plaintiff filed for a motion for
reconsideration of the grant of summary judgment for the Board.
In St. Rose v. Volcker, No. 8 1 0423 (D.D.C., filed February 20,
1981), petitioner challenged the actions of the Board and of the Department of the Treasury relating to the
fiscal and monetary policy of the
United States. This case was dismissed, by motion, on June 12, 1981.

Litigation
In First Bank & Trust Co. v.
Board of Governors, No. 81-38
(E.D. Ky., filed February 24, 1981),
plaintiff seeks declaratory and injunctive relief with respect to the Board's
determination that plaintiff was not
eligible to qualify for the phasing-in
of required reserves on deposits that
is applicable to nonmember banks
under the Monetary Control Act of
1980. The Board's motion for summary judgment is pending.
In Riggs National Bank v. Board
of Governors, No. 81-1242 (D.C.
Cir., filed March 5, 1981), petitioner
sought review of a Board decision,
dated March 4, 1981, that denied a
petition that the Board take enforcement action in a takeover bid. This
case was dismissed on the petitioner's
motion of April 3, 1981.
In People of the State of Arkansas
v. Board of Governors, No. C 8 1 2044 (W.D. Ark., filed March 30,
1981), plaintiff protested Board
policies that caused high interest rates.
This case was dismissed on the
Board's motion on August 28, 1981.
In Public Interest Bounty Hunters
v. Board of Governors, No. C 8 1 1184A (N.D. Ga., filed June 25,
1981), plaintiff alleges that various
Board actions violate the Bank Holding Company Act and the GlassSteagall Act. The Board's motion to
dismiss, filed September 23, 1981,
is pending.
In Bank Stationers Association etal.
v. Board of Governors, No. C 8 1 1417A (N.D. Ga., filed July 27,
1981), plaintiffs sought declaratory
and injunctive relief against the fees
established by the Board, pursuant
to the Monetary Control Act of 1980,
for automated clearinghouse services.
On December 22, 1981, the court
dismissed the complaint because of



173

lack of standing. On January 21,
1982, the plaintiffs filed an appeal
with the Court of Appeals for the
Eleventh Circuit.
In American Bankers Association
v. Federal Home Loan Bank Board
et al, No. 81-1933 (D.D.C., filed
August 18, 1981), plaintiff challenged
the regulations of the Board of Governors and of the Federal Home Loan
Bank Board governing eligibility requirements for negotiable order of
withdrawal (NOW) accounts at depository institutions. The court, on
September 15, 1981, enjoined the
implementation of regulations promulgated by the FHLBB that permitted
NOW accounts for governmental
units and nonprofit organizations unless such groups were also eligible
for NOW accounts under the rules
of the Federal Reserve Board.
In Hall v. Board of Governors,
No. C81-1786A (N.D. Ga., filed
September 28, 1981), plaintiff seeks
declaratory and injunctive relief and
damages in connection with an order
issued by the Board against a bank
pursuant to the Financial Institutions
Supervisory Act of 1966.
In Wolfson v. Board of Governors,
No. 81-913 (M.D. Fla., filed September 28, 1981), plaintiff seeks declaratory and injunctive relief and damages
in connection with an order issued by
the Board against a bank pursuant to
the Financial Institutions Supervisory
Act of 1966.
Two cases involving the System's
employment practices were pending
in 1981. In Bollow v. Board of Governors et al, No. C76-977 (N.D.
Cal., filed May 12, 1976), plaintiff, a
former employee of the Federal Reserve Bank of San Francisco, sought
damages against the Board and that
Bank in connection with the termina-

174

Litigation

tion of plaintiff's employment. On
September 23, 1977, the court
granted the Board's motion for summary judgment, and on July 13, 1981,
the Court of Appeals for the Ninth
Circuit affirmed that decision (650
F.2d 1093). Plaintiff's petition for
certiorari is pending (No. 81-1224).




In Hilliard v. Volcker, No. 76-1655
(D.D.C., filed December 8, 1976),
the district court, on January 12,
1982, after a remand from the court
of appeals (659 F.2d 1125), found
no grounds for plaintiff's claim of
discrimination and rendered judgment for the Board.

175

Legislation Enacted
Increases in Debt Ceiling
During 1981, the Congress temporarily raised the public debt ceiling
three times: to $985 billion through
September 30 (Public Law 97-2,
approved February 7); to $999.8 billion for September 30 only (Public
Law 97-48, approved September 30);
and to $1,079.8 billion, for the period
October 1, 1981, through September 30, 1982 (Public Law 97-49,
approved September 30, 1981).
C ash Discount Act
Public Law 97-25, the Cash Discount
Act, approved July 27, 1981, contains
the following provisions:
1. Title I amends section 167(b)
of the Truth in Lending Act (1) to
provide that discounts offered to induce payment by means other than
an open-end credit plan, as well as a
credit card, do not constitute finance
charges; (2) to remove the limitation
on the amount of the discount to
5 percent of the regular price; and
(3) to delete the requirement that the
disclosures of availability accord with
Board regulations. This title also
amended section 103 of the Truth in
Lending Act to include a definition
of regular price and nullified existing
Federal Reserve rules.
2. Title II extends a current statutory prohibition through February 27,
1984, that forbids a seller in any sales
transaction from imposing surcharges
on the use of credit cards.
Title II also directs the Federal
Reserve to prepare a comparative
study on the effect that charge-card
transactions have on card issuers,




merchants, and consumers with regard to retail sales, usage, merchant
cost, and pricing.
3. Title III, consisting of miscellaneous amendments, contains the
following provisions:
(a) Clarifies that a creditor, or
creditor's assignee, who elects to comply with the terms of the Truth in
Lending Simplification and Reform
Act (Public Law 96-221, Title VI),
is subject to the terms in the amended
act that pertain to civil liability.
(b) Amends the National Bank
Act to allow a national bank to continue, until December 31, 1982, to
hold title to real estate that it possessed on July 27, 1981, if the real
estate was carried on its books at
nominal value on December 31, 1979,
and if earnings from the real estate
are separately disclosed in the bank's
financial statements.
(c) Allows the President to appoint a person over sixty-four years
old to the post of Surgeon General
of the United States.
International Investment Survey
Act of 1976
Public Law 97-33, approved August
7, 1981, which amends the International Investment Survey Act of 1976,
requires the President to conduct a
benchmark survey on foreign direct
investment in the United States for
calendar years 1980, 1987, and every
fifth year thereafter; and on U.S.
direct investment abroad for calendar
years 1982, 1989, and everyfifthyear
thereafter. The legislation requires
that data on portfolio investments

176

Legislation Enacted

abroad be compiled each year and an
analysis provided to the Congress not
later than July 1 of the following year.
The Secretary of Commerce is required to estimate the cost of monitoring and compiling data on legislation that each foreign country has
enacted to regulate or restrict foreign
investment in that country.
Economic Recovery Tax Act
of 1981
Public Law 97-34, the Economic Recovery Tax Act of 1981, approved
August 13, 1981, consists of eight
titles.
1. Title I pertains to individual
income taxes. It reduces certain tax
rates, adjusts taxes on individuals
who are living abroad, allows individuals who do not itemize to deduct
charitable contributions subject to
certain percentage limitations, extends from eighteen months to two
years the rollover period for the sale
and purchase of a principal residence,
and makes certain other adjustments
to tax rates and deductions.
2. Title II enacts certain business
tax incentives including accelerated
depreciation schedules, modified investment tax credits, incentives for
research and development expenditures, and a reduction in the corporate
tax rates of small businesses.
It contains provisions concerning
financially troubled savings and loan
associations and allows tax-free mergers and reorganizations of such institutions if they are supervised by the
primary federal or state regulator.
This title allows an acquiring financial
institution to use some pre-reorganization tax-loss carryovers belonging
to an acquired institution; it permits
an assisted institution to exclude from
its gross income any assistance it re-




ceived from the Federal Savings and
Loan Insurance Corporation even if
the institution offers debt or equity
instruments in exchange for the assistance; and it specifies that, for tax
purposes, the term mutual savings
bank includes stock savings banks.
Title II contains several other tax
measures that are unrelated to financial institutions.
3. Title III concerns savings incentives for individuals and, among other
things, excludes from gross income,
for tax purposes, interest on certain
savings certificates (all savers certificates) issued by depository institutions; allows all individuals to have individual retirement accounts (IRAs);
and excludes from gross income, for
tax purposes, certain automatically reinvested dividends.
Specifically, Title III provides the
following new tax benefits.
All savers certificates. Individual
returns may reflect a lifetime exclusion from gross income of $1,000—
$2,000 on joint returns—regardless of
the amount of interest earned or the
tax year in which it was earned, on
all savers certificates issued during
the period October 1, 1981-December 31, 1982. The certificates must
have a maturity of one year, and
have an annual investment yield equal
to 70 percent of the comparable yield
on 52-week Treasury bills, and must
be available in denominations of at
least $500. Certain other restrictions
apply.
Depository institutions offering all
savers certificates must place in "qualified residential financing" at least
75 percent of the lesser of (1) the
proceeds of all savers certificates that
are issued in a calendar quarter,
or (2) "qualified net savings," which
is the amount by which inflows of
savings and time deposits exceed

Legislation Enacted
outflows in a calendar quarter. Qualified residential financing is generally
understood to be mortgage lending
on one- to four-unit residential property and participation in secondary
markets for residential mortgages.
Individual retirement accounts. Effective January 1,1982, all individuals
may place up to $2,000 per year, and
married couples with one income
earner may place $2,250, in an individual retirement account. The principal amount and any interest earned
are excluded from gross income.
Taxes are deferred until the individual begins making withdrawals. Other
penalties may apply to premature
withdrawals or distributions.
Other. An exclusion from income
is created for certain dividends reinvested in public utility stock in the
tax years 1982-85; the title also clarifies rules on employee stock ownership plans.
4. Title IV concerns provisions for
estate and gift taxes; Title V, tax
straddles; Title VI, the windfall profit
tax on oil; Title VII, tax administration; Title VIII, miscellaneous provisions pertaining to fringe benefits,
tax-exempt obligations of mass transit
and volunteer fire departments, telephone excise taxes, U.S. real property,
and foreign investment companies.
Defense Production Act and
Gold Commission
Public Law 97-47, approved September 30,1981, extends the Defense Production Act of 1950, 50 U.S.C. App.
2166(a), to September 30, 1982.
Section 301 of the Defense Production Act of 1950 is the basis of guarantees of loans for defense production. Public Law 97-47 also extends
the due date for the Gold Commission's report to the Congress to
March 31, 1982.




177

Overseas Private Investment
Corporation Amendment Act
of 1981
Public Law 97-65, approved October 16, 1981, provides for the continuation, for an additional four years,
of insurance and guaranties by the
Overseas Private Investment Corporation of U.S. investments that complement U.S. foreign-assistance programs
and that contribute to the economic
development of less-developed countries. The act makes technical
changes in the organization and management of the OPIC Board of Directors, adds civil strife to the political
risks that can be insured, and makes
technical changes in the insurance
program, the guaranty program, and
reporting requirements.
George Washington
Commemorative Coin Act
Public Law 97-104, the George
Washington Commemorative Coin
Act, approved December 23, 1981,
requires the Secretary of the Treasury to mint and issue before December 31, 1983, up to ten million onehalf dollar coins to commemorate the
250th anniversary of George Washington's birth. The coins, which are
to be legal tender, will be sold at a
price equal to the costs of production,
minting, distribution, and promotion,
plus a surcharge of not more than
20 percent. Proceeds will be used
solely to reduce the national debt.
Farm Credit Administration
Public Law 97-111, approved December 26, 1981, makes effective on
that date the final regulations issued
by the Farm Credit Administration to
implement the Farm Credit Act of
1971, as amended by the Farm Credit

178

Legislation Enacted

Act Amendments of 1980. The regulations pertain to loan policies and
operations—specifically, special lending programs—and expand the authority of financial institutions, other
than institutions in the farm credit
system, to borrow from, and discount
with, Federal Intermediate Credit
Banks.
International Banking Facilities
Public Law 97-110, approved December 26, 1981, contains the following provisions:
1. Title I amends the Federal Deposit Insurance Act to specifically
exclude from federal deposit insurance coverage all international banking facility deposits, as defined by the
Federal Reserve Board. The act also
extends federal deposit insurance coverage to branches of insured banks
that operate in the Trust Territory of
the Pacific Islands.
2. Title II removes the existing
statutory limitation (20 percent of
investment portfolio) on purchases
by the Federal Home Loan Mortgage
Corporation and the Federal National
Mortgage Association of mortgages
that are more than one year old.
3. Title III contains several amendments.
(a) Section 301 postpones the
effective date of the Truth in Lending
Simplification Act (Title VI of the
Depository Institutions Deregulation
and Monetary Control Act of 1980)
until September 30, 1982.
(b) Section 302 amends the
Financial Institutions Regulatory and
Interest Rate Control Act of 1978 to
allow a 10-year exemption for individuals who were serving as management officials of more than one financial institution before November 10,
1978, unless a change in circumstances occurs between the interlock


ing institutions or officials; if a change
in circumstances occurs, the exempted
interlock must be terminated within
15 months.
(c) Section 302 excludes the
following from the term change in
circumstances: mergers, acquisitions,
an increase in total assets, the establishment of one or more offices, and
a change in management responsibilities.
(d) Section 302 also authorizes
a 10-year exemption from the restrictions of Title II of the Financial Institutions Regulatory and Interest Rate
Control Act of 1978 for an individual
who is a management official of a
banking organization and of a nonbanking organization that becomes a
savings and loan holding company.
Section 303 deals with the Alaska
USA Federal Credit Union.
Social Security
Public Law 97-123, approved December 29, 1981, amends the Omnibus Budget Reconciliation Act of
1981 to restore through the end of
1981 the minimum benefit under the
Social Security Act, which was eliminated effective October 1981. Thus a
person who becomes eligible for oldage or disability benefits after October 1981, but before January 1982,
will continue to be entitled to the
statutory minimum benefit; the extension will be financed, in part, by
extending a withholding of social security taxes from the first six months
of certain forms of sick pay. However, a person who becomes eligible
for old-age or disability benefits after
January 1982 will receive benefits
based solely on actual earnings.
In addition, this act allows interfund borrowing among the Federal
Old-Age and Survivors Trust Fund,
the Federal Disability and Insurance

Legislation Enacted

179

Trust Fund, and the Federal Hospital that social security payments to prisInsurance Trust Fund to ensure that oners may be halted. With regard to
they remain solvent. This authority active social security accounts, the
expires December 31, 1982.
Secretary of the Treasury must also
The act also provides criminal report to the Congress, within 90 days
penalties for the misuse of social of the act's enactment, on a plan for
security numbers. And, to carry out identifying improper payments being
a congressional decision in 1980, the made in the name of deceased persons
Secretary of the Treasury may obtain to prevent payments from continuing
information on prisoners from state after death and being illegally received
and federal correctional facilities so by another individual.




180

Banking Supervision and Regulation
One of the Federal Reserve's principal responsibilities is the supervision
and regulation of commercial banking
organizations. In carrying out its
duties, the Federal Reserve supervises
and regulates state member banks;
bank holding companies and their
nonbank subsidiaries; international
activities engaged in by banks and
bank holding companies through
branches, Edge and Agreement corporations, or other foreign investments; and the U.S. banking and nonbanking activities of foreign banks.
Many of the Federal Reserve's activities are conducted in coordination
with other federal and state regulatory
agencies. A description of how the
System carried out these responsibilities during 1981 follows.
Supervision for
Safety and Soundness
Examinations and Inspections
The on-site review of operations is the
primary mechanism for ensuring the
safety and soundness offinancialinstitutions. Examinations or inspections
of these operations entail (1) an
appraisal of the quality of the institution's assets; (2) an evaluation of
management, along with internal operations, policies, and procedures;
(3) an assessment of the key financial
factors of capital, earnings, asset and
liability management, and liquidity;
and (4) a review for compliance with
applicable laws and regulations.1
1. The Board's Division of Consumer and
Community Affairs handles compliance
with consumer and civil rights laws through




State Member Banks
The Federal Reserve is the primary
federal supervisor and regulator of
state-chartered commercial banks that
are members of the Federal Reserve
System. At the end of 1981, there
were 1,020 state member banks,
accounting for approximately 7 percent of all insured commercial banks.
Because these banks typically were
larger than the average, they held
around 18 percent of all insured commercial bank assets.
State member banks are generally
examined every 18 months, except
when significant weaknesses or other
conditions call for more frequent
examination. In 1981, System personnel conducted 873 of these examinations, many of them conducted
jointly or concurrently with examiners
from state regulatory agencies.
Bank Holding Companies
During 1981, the number of bank
holding companies increased by 588
to a total of 3,644. These organizations control commercial banks that
hold about three-fourths of the total
assets of insured commercial banks
in the United States.
Most large bank holding compathe use of specially trained examiners at
the Federal Reserve Banks. These regulatory responsibilities are covered in the
"Consumer and Community Affairs" section of this REPORT. Compliance with
other statutes and regulations, which is
treated in this section, is the responsibility
of the Board's Division of Banking Supervision and Regulation and of the Reserve
Bank examiners who check for safety and
soundness.

Banking Supervision and Regulation

181

banks that engage in banking in the
United States through branches, agencies, commercial lending companies,
and subsidiary banks. In fulfilling
this responsibility, the Federal Reserve uses reports of examination
made by the appropriate federal regulatory agency for insured branches
and for federally chartered branches
and agencies, or commercial bank
subsidiaries; and by the appropriate
state bank supervisory authority for
state-chartered branches and agenInternational Activities
cies. While the states have primary
Edge and Agreement corporations. examination authority over stateEdge corporations are chartered by chartered uninsured branches and
the Board to conduct an international agencies, the Federal Reserve particibanking business. Agreement corpo- pated in the examination of 124 such
rations are state-chartered companies offices in 1981.
that enter into an agreement with the
During the 1970s, foreign entities
Board to limit their operations to rapidly expanded their operations in
international banking. During 1981, the United States; today they are a
the Federal Reserve conducted 171 significant element in the U.S. bankexaminations of Edge corporations ing system. As of December 31,
and their branches and of Agreement 1981, some 193 foreign banks opercorporations.
ated 375 state-chartered uninsured
Overseas operations of U.S. bank- branches and agencies and 24
ing organizations. Examinations of branches insured by the Federal Dethe international operations of state posit Insurance Corporation, and 35
member banks, Edge corporations, branches and agencies chartered by
and bank holding companies are con- the Office of the Comptroller of the
ducted at the banking organization's Currency. Foreign banks also owned
head office in the United States, where a controlling interest in 55 U.S. subthe ultimate responsibility for over- sidiary banks as of June 30, 1981.
seas facilities lies. To verify and sup- Altogether, these foreign banks conplement the results of the head-office trolled 13.6 percent of U.S. banking
examinations, on-site reviews of im- assets as of September 30, 1981.
portant overseas facilities are performed at least every three years.
In 1981, the Federal Reserve ex- Specialized Examinations
amined 13 foreign branches of state The Federal Reserve conducts certain
member banks and 14 overseas sub- specialized examinations as discussed
sidiaries of Edge corporations and below.
bank holding companies.
U.S. activities of foreign banks. Electronic Data Processing
The Federal Reserve has broad resid- Examinations
ual and oversight authority for the The Federal Reserve examines the
electronic data processing (EDP)
Digitizedsupervision and regulation of foreign
for FRASER
nies, as well as small companies with
significant nonbank assets, are inspected at least every 18 months; the
others are inspected at least every
three years. The inspection focuses
on the operations of the parent holding company and its nonbank subsidiaries because these entities are not
examined by the federal banking
agencies. During the year, System
staff conducted 1,119 inspections of
bank holding companies.



182

Banking Supervision and Regulation

activities of state member banks, as
well as independent centers that provide EDP services to these banks.
During the year, System EDP examiners conducted 224 on-site reviews
of state member banks and independent data centers. In addition, the
Federal Reserve received 75 EDP
examination reports that were prepared by other federal agencies under
the Interagency EDP Examination
Program.

nies that act as municipal securities
dealers or as clearing agencies.
Of the 47 state member banks
registered with the Board as dealing
in municipal securities for their trading accounts, 36 were examined in
1981.
A clearing agency acts as a custodian of securities for the settlement
of securities transactions by bookkeeping entries. All four of these
agencies that were registered with the
Board were examined in 1981; two
Trust Examinations
examinations were conducted jointly
The Federal Reserve examines trust with the Securities and Exchange
departments of state member banks, Commission.
trust companies that are members of
the Federal Reserve System, and certain nondepository trust-company Improvements to
subsidiaries of bank holding compa- Examinations and Inspections
nies. These examinations determine
whether the trust functions are con- During the year, the Federal Reserve
ducted in accordance with applicable took a number of steps to enhance its
fiduciary principles and with other ap- examination and inspection programs.
propriate laws and regulations. Dur- Definition of Bank Capital
ing the year, 334 institutions that During the year, the Board adopted a
exercise trust powers under the broadened definition of bank capital
Board's supervision were examined.
for determining the adequacy of capital in state member banks. The definiExaminations of Transfer Agents
System examiners conduct separate tion was recommended by the Federal
reviews of state member banks and Financial Institutions Examination
bank holding companies that act as Council to promote uniformity among
transfer agents. Transfer agents federal bank regulators and to provide
countersign and monitor the issuance guidance to commercial banks. Under
the new definition, bank capital conof securities, register transfers of sesists of two elements: primary capital
curities, and exchange or convert
and secondary capital. Primary capital
securities. During 1981, 135 member comprises common and perpetual prebanks and bank holding companies ferred stock, surplus and undivided
that were registered with the Board profits, contingency and other capital
of Governors as transfer agents were reserves, mandatory convertible inexamined.
struments, and 100 percent of funds
Examinations of Municipal Securities set aside as reserves for possible loan
losses. Secondary capital comprises
Dealers and Clearing Agencies
As a result of the Securities Acts limited-life preferred stock and subAmendments of 1975, the Board is ordinated notes and debentures; howresponsible for supervising state mem- ever, there are restrictions upon the
ber banks and bank holding compa- amount of these less permanent funds




Banking Supervision and Regulation
that may be counted as part of the
bank's capital structure.

183

certain state-chartered banks that are
members of the Federal Reserve System. Under the program, the Reserve
Banks and the state banking authorities examine, in alternate years, the
state member banks that they have
agreed upon. The program was designed to enhance federal and state
cooperation, eliminate duplication of
effort, and reduce the burden on
commercial banks. Thus far, the
Federal Reserve participates in AEPs
with 17 states, and discussions at
year-end were in process to enter into
AEP agreements with two others.

Capital Adequacy Guidelines
The Federal Reserve and the Office
of the Comptroller of the Currency
issued ratio guidelines for assessing the
adequacy of capital in the examination and supervision of national
banks, state-chartered banks that are
members of the Federal Reserve System, and bank holding companies.
The objectives of the guidelines are
to address the long-term decline in
capital ratios, particularly those of
certain large multinational banks; introduce greater uniformity in the Bank Holding Company
supervisory assessment of capital ade- Supervision Manual
quacy; provide direction for capital During 1981, the Federal Reserve's
and strategic planning to banks and Bank Holding Company Supervision
holding companies; and permit some Manual was completed and copies
reduction of the disparities in capital were made available to banking
ratios among banking organizations organizations and the public upon
of different sizes. In general, the request. The manual contains Board
guidelines apply to sound, well-man- policies, formal inspection procedures,
aged organizations and will be applied and special sections on supervisory
in a flexible manner that allows for topics that are unique to bank holding
consideration of differences in the companies, to nonbanking activities,
situations of individual institutions.
and to holding company financial
analysis.
Frequency of
Examinations and Inspections
Monetary Control Act and
The Board adopted a new policy on Regulation D:
the frequency of examinations and Examination Procedures
inspections. The policy provides for At the request of the Federal Financial
extending the time between examina- Institutions Examination Council, the
tions of sound companies and empha- Federal Reserve adopted new uniform
sizes the supervision of institutions examination procedures for determinthat have problem characteristics and ing the compliance of banks, thrift inthat are thus most in need of fre- stitutions, and credit unions with the
quent on-site reviews.
Monetary Control Act of 1980 and
with Regulation D. Implementation
of these procedures by all five agenAlternate Examination Program
During 1981, the Federal Reserve, in cies at institutions under their jurisconjunction with a number of state diction should assist in the accurate
banking authorities, adopted an alter- compilation of monetary aggregates
nate examination program (AEP) for by the Federal Reserve.




184

Banking Supervision and Regulation

Trust Examinations
To supplement the supervision of the
increasing number of nondeposit
trust companies that are subsidiaries
of bank holding companies, the Board
has authorized a formal program of
examinations for those trust companies not supervised by any other federal banking agency. In addition, a
program of limited inspections of
state member banks, bank holding
companies, and Edge Act corporations that conduct foreign fiduciary
activities has been authorized. Both
programs will begin in 1982.
Surveillance and
Monitoring Program
The Federal Reserve System performs
computer surveillance of member
banks on a quarterly basis and of large
bank holding companies on a semiannual basis. Current financial reports
of banks and bank holding companies
are screened periodically at the Board
and sent to the Reserve Banks, which
perform the financial analysis and
initiate any corrective action that is
warranted.
If surveillance indicates that a bank
or bank holding company is in good
financial condition and that there is
no trend toward serious deterioration
in the institution's keyfinancialratios,
then the time between on-site examinations of banks or bank holding
companies may be lengthened. On the
other hand, banking organizations
that surveillance suggests have a poor
and deteriorating financial condition
are likely to have their examination
date accelerated.
During 1981, a major effort was
made with the other federal banking
agencies to develop a joint uniform
bank performance report. In addiDigitizedtion, the Federal Reserve undertook
for FRASER


to develop a performance report to
assist in the Systemwide effort to
monitor bank holding companies on
an ongoing basis.
Enforcement Actions and
Civil Money Penalties
Under the Financial Institutions Supervisory Act, the Board has authority to enter into written agreements
or cease-and-desist actions with state
member banks, bank holding companies, and persons associated with
such organizations, that engage in
unsafe or unsound practices or violate applicable laws or regulations.
The Board may also assess civilmoney penalties for violations of a
cease-and-desist order, of the Bank
Holding Company Act, or of certain
provisions of the Federal Reserve Act.
In 1981, the Reserve Banks recommended or initiated 31 enforcement
actions, most dealing with unsafe or
unsound banking practices; 26 were
completed by year-end. In connection with the completed actions, the
Board of Governors issued 12 ceaseand-desist orders and 2 temporary
cease-and-desist orders, and entered
into 12 written agreements: 15 involved banks; 8 involved bank holding
companies or their subsidiaries; and
3 involved individuals participating in
the affairs of the financial institutions.
In 1981, the Board collected 12
civil money penalties totaling $598,000, and assessed, but did not collect,
an additional civil money penalty. Of
the total collected or assessed, 4 were
paid by banks, 5 were paid by or
assessed against bank holding companies, and 4 were paid by individuals.
In 1981, the Board also issued a
Notice of Suspension and an Order
of Removal, based on one individual's
indictment and subsequent conviction.

Banking Supervision and Regulation
The Board made available to the
public a description of all formal supervisory actions completed during
the year and the reasons for them.
This action was taken to achieve the
fullest public disclosure of information consistent with valid interests of
confidentiality.
Staff Training
System training activities continued
to emphasize analytical and supervisory themes common to the four
areas of supervision—examinations,
inspections, applications, and surveillance—while stressing areas of interdependence. During the year, the
Federal Reserve conducted 12 banking schools—4 introductory, 5 intermediate, and 3 advanced. In addition,
2 bank holding company application
schools and 1 financial analysis program for senior examiners were conducted. For its consumer examiners,
the System offered 1 consumer compliance examination school and 1 advanced consumer and community
affairs seminar. Programs in such
specialized areas as trust activities,
international banking, electronic data
processing, consumer affairs, management, and instructor training were
conducted by the Federal Financial
Institutions Examination Council. In
1981, 445 System employees completed System programs and 254 completed Examination Council courses.
Various staff from state banking departments and several foreign central
banks attended the System schools.
Regulation of
U J , Banking Structure
The Board of Governors administers
the Bank Holding Company Act, the
Bank Merger Act, and the Change in
Bank Control Act. In the course of



185

doing so, the Federal Reserve acts
on a variety of proposals that directly
or indirectly affect U.S. banking structure at the local, regional, and national levels. The Board also has primary responsibility for regulating the
international operations of domestic
banking organizations and of the U.S.
operations of foreign banks that
engage in banking in the United
States, either directly through a branch
or agency, or indirectly through a
subsidiary commercial lending company. In addition, the Board has
established regulations for the interstate banking activities of these foreign banks, as well as for foreign
banks that control a U.S. subsidiary
commercial bank.
Bank Holding Company Act
By law, a company must obtain the
Board's approval to form a bank holding company by securing control of
one or more banks. And, once
formed, a bank holding company
must receive the Board's approval
before acquiring more banks or related, nonbanking companies.
In deciding a bank holding company application, the Board considers the likely effects of the proposal
on competition, the convenience and
needs of the community, the applicant's financial and managerial resources, and the prospects of both
the applicant and the firm to be
acquired.
In 1981, the Board—and, under
delegated authority, the Federal Reserve Banks, the Board's Office of the
Secretary, and the Director of the
Board's Division of Banking Supervision and Regulation—acted on
1,916 bank holding company applications. The System approved 827
proposals to organize holding com-

186

Banking Supervision and Regulation

Bank Holding Company Decisions by the Federal Reserve, 1981
Direct action
Proposal

Delegated authority
Office of
the
Secretary

Board of
Governors

Federal
Reserve Banks

Approved Denied Approved Approved
Formation of
holding company
Acquisition
Bank
Nonbank
Merger of holding companies
Other
Total

41

13

39
58
8
9

9
1
0
2

155

25

Permitted

777

43
9
21
I
64

Total

840

218
81
13
1

582

309
731
23
13

1,090

582

1,916

1. This proposal was approved by the Director of the Division of Banking Supervision and

Regulation, rather than the Office of the
Secretary.

panies and denied 13; 300 bank acquisitions by existing bank holding
companies were approved, while 9
were denied; and 730 requests to acquire nonbank companies that are
closely related to banking were approved or permitted and 1 rejected.
Data on holding company decisions
are shown in the table.

were approved by the Board; 7 by
the Secretary of the Board under delegated authority; and 31 by the Reserve Banks under delegated authority. As required by law, a description
of each merger is contained in table 19
in the Statistical Tables section of
this REPORT.
When one of the other two federal
banking agencies has jurisdiction over
a merger, the Board is asked to comment on the competitive factors to
assure comparable enforcement of the
antimonopoly provisions of the act.
On behalf of the Board, the Reserve Banks submitted 238 reports
on competitive factors to the Comptroller of the Currency and 295 such
reports to the Federal Deposit Insurance Corporation.
The Board, along with the Office
of the Comptroller of the Currency
and the FDIC, has adopted standard
terminology for assessing competitive
factors in bank merger cases that
should result in greater consistency in
administering the Bank Merger Act.

Bank Merger Act
The Bank Merger Act requires that
all proposed bank mergers receive the
prior approval of the appropriate federal bank regulatory agency. If the
surviving bank of the merger is a state
member bank, the Federal Reserve
has primary jurisdiction.
Before passing on a bank merger,
the Federal Reserve considers the
competitive effects of the proposal
and the financial and managerial resources and prospects of the existing
and proposed institution, as well as
the community's convenience and
needs. The Board must also consider
the views of certain other agencies on
the competitive factors involved in
the transaction.
During 1981, the Federal Reserve
approved 43 merger applications: 5



Change in Bank Control Act
The Change in Bank Control Act of
1978 gave the federal banking agen-

Banking Supervision and Regulation
cies the authority to disapprove
changes in the control of banks and
bank holding companies. The Federal Reserve is the agency responsible
for changes in the control of state
member banks and bank holding companies. Factors to be considered in
determining whether a transfer of control should be denied include the
financial condition, competence, experience, and integrity of the acquiring person, and the effect on competition.
Eleven changes in ownership of the
stock of state member banks were
reported in 1981, and ninety-one were
for holding companies; all but three
were processed by the Reserve Banks.
There were no denials.

187

the Board approved the opening of
21 foreign branches.
By the end of 1981, 156 member
banks were operating 800 branches in
foreign countries and overseas areas
of the United States, a net increase
of 11 for the year. One hundred
twenty-one national banks were operating 674 of these branches, while
35 state member banks were operating the remaining 126 branches.

International Banking Facilities
Effective December 3, 1981, the
Board amended its Regulations D
and Q to permit the establishment of
international banking facilities (IBFs)
in the United States. IBFs may be
established, subject to conditions
specified by the Board, by U.S. depository institutions, and by Edge and
Agreement corporations. These faciliInternational Activities of
ties may also be set up by U.S.
U.S. Banking Organizations
branches and agencies of foreign
The Board has three principal statu- banks.
tory responsibilities in connection
An IBF is essentially a set of asset
with the supervision of the interna- and liability accounts that is segretional operations of U.S. banking gated from other accounts of the
organizations: (1) to issue licenses establishing office. In general, defor foreign branches of member banks posits from and credit extended to
and regulate the scope of their activi- foreign residents or other IBFs can
ties; (2) to charter and regulate Edge be booked at these facilities free from
corporations; and (3) to authorize domestic reserve requirements and
and regulate overseas investments by limitations on interest rates.
member banks, Edge corporations,
IBFs will be examined along with
and bank holding companies.
other parts of the establishing office,
and their activities will be reflected
Foreign Branches
in the supervisory reports submitted
of Member Banks
to the bank regulatory agencies by
Under provisions of the Federal Re- that office. By year-end 1981, 270
serve Act and Regulation K, member offices had established IBFs.
banks may establish branches in foreign countries, subject, in most cases, Edge and Agreement Corporations
to the Board's prior approval. In re- Under sections 25 and 25(a) of the
viewing proposed foreign branches, Federal Reserve Act, Edge and
the Board considers the requirements Agreement corporations may engage
of the governing statute, the condition in international banking and foreign
of the bank, and the bank's experience financial transactions. These corpoin international business. In 1981, rations, which are usually subsidiaries



188

Banking Supervision and Regulation

the Board amended its regulation
dealing with Edge corporations to
provide that, with Board approval,
subordinated capital notes or debentures, in an amount not to exceed
50 percent of nondebt capital, may
be included for determining capital
adequacy in the same manner as for
a member bank.
The 7 percent standard has, in fact,
led to some added leveraging by Edge
corporations. Nonetheless, 53 of the
69 banking Edge corporations had
ratios more than twice the new standard on September 30, 1981, so their
capitalization in relation to risk assets
remained high by international banking standards.
Two other important changes arisForeign Investments
ing from the IBA permitted Edge
Under authority of the Federal Re- corporations (1) to be owned by
serve Act and the Bank Holding Com- foreign banks and (2) to establish
pany Act, in 1981 the Board author- branches within the United States.
ized 80 foreign investments by By year-end 1981, the Board had
member banks, Edge and Agreement authorized foreign banks to own
corporations, and bank holding com- directly or indirectly 17 Edge corpanies, mostly for additional invest- porations and had allowed 26 Edge
ments in financially related com- corporations to operate an aggregate
panies.
of 80 domestic branches.

of member banks, provide their owner
organizations with additional powers
in two areas: (1) they may conduct
a deposit and loan business in states
other than that of the parent, provided that the business is strictly related to international transactions;
and (2) they have somewhat broader
foreign investment powers than member banks, being able to invest in foreign financial organizations, such as
finance companies and leasing companies, as well as in foreign banks.
In 1981, the Board approved the
establishment of 19 Edge corporations
and 1 Agreement corporation and
the operation of 47 branches by
established Edge corporations.

Capitalization and Activities
of Edge Corporations
The International Banking Act (IBA)
removed the statutory limit on liabilities of an Edge corporation under
which the corporation's debentures,
bonds, and promissory notes could
not exceed 10 times the corporation's
capital and surplus. The Board established a new capital requirement of
7 percent of risk assets for Edge corporations engaging in international
banking in the United States to permit
these corporations to compete more
effectively with other international
organizations that are more highly
leveraged. Effective July 29, 1981,



Home-State Designations and
Expansion by Foreign Banks
Under the International Banking Act,
foreign banks that engage in banking
in the United States were allowed to
conduct a full-service banking and
deposit-taking operation in only one
state, except for grandfathered facilities in other states. Under the Board's
regulations, the full-service banking
state is designated the "home state."
In 1981, 130 foreign banks chose
home states: 95 chose New York; 29,
California; 2, Illinois; 2, Florida; 1,
the District of Columbia; and 1,
Massachusetts. A foreign bank may

Banking Supervision and Regulation

189

20 percent from 1980 to 1981, the
System still acted on 95 percent of
these proposals within 90 days of the
filing of a complete application. In
fact, for the last five years, the Federal Reserve has completed at least
90 percent of holding company proposals within 90 days.
Forty of the 43 bank merger applications were processed within 90
days; the 3 that took longer involved
Delegation of Applications
one applicant that was involved in
In exercising its responsibility to lengthy protest proceedings. The
formulate policies and procedures in System also prepared 533 reports on
the applications area, the Board dele- competitive factors on proposed merggates certain regulatory functions— ers for the other two banking agenincluding the authority to approve, cies; all but a few were completed
but not deny, certain types of appli- within a 30-day limit. Of the 102
cations—to the Reserve Banks and change-of-control notices, 99 were
to the Board's Division of Banking handled well within 90 days.
Supervision and Regulation and its
The System also measures its perOffice of the Secretary.
formance in processing international
In September 1979, the Board applications against a 90-day stanissued revised rules that delegated dard. During 1981, the Federal Readditional authority to the Reserve serve acted on 267 international apBanks to approve applications for plications, 92 percent of which were
bank holding companies and bank decided in 90 days or less.
mergers. During 1980, the first full
During 1981, several changes in
year under expanded delegation, 89 procedures were instituted to further
percent of all holding company and expedite applications processing and
merger applications were acted on to make more efficient use of Board
under delegated authority; the pro- and Reserve Bank staff, including the
portion during 1981 was about 87 establishment of formalized procepercent. In contrast, only 78 percent dures relating to the handling of prowere processed by the Reserve Banks tested applications and the steamlinin 1978, the last full year before ex- ing of certain internal procedures.
panded delegation. The benefits that
were expected from broadened delegation continue to be achieved: rou- Public Notice of Board Decisions
tine cases have been removed from Each action by the Board or its delethe Board's agenda to allow more gated representative on a case involvefficient use of staff time of the Board ing bank holding companies, a bank
and of the Reserve Banks.
merger, change in control, or international banking is effected by an
order or announcement. Orders set
Timely Processing of Applications
forth the essential facts of the appliAlthough the number of holding com- cation, the basis for the decision, and
pany applications increased about the decision made. Announcements

continue to expand its full-service
banking operations in its home state,
but must restrict nongrandfathered
banking activities in other states. A
one-time change in a home state is allowed, provided that banking operations in the previous home state that
are not grandfathered be subsequently
limited.



190

Banking Supervision and Regulation

state merely the action taken by the
Federal Reserve. All orders and announcements are released immediately
to the public and are reported in the
Federal Reserve Bulletin and the
weekly H.2 release (Actions of the
Board; Applications and Reports).
Announcements of applications and
notices received by the System, but
not yet acted on, are also made in the
H.2 release.

Policy Decision on Financial
Factors in Small One-Bank
Holding Company Formations
On March 28, 1980, the Board issued
a policy statement designed to facilitate the transfer of ownership of small
community banks without diluting
bank safety and soundness. Under
that policy the gross capital in the
subsidiary bank would at no time fall
below 8 percent of assets so long as
the debt-to-equity ratio of the holding company was in excess of 30 percent. On December 17, 1981, the
Board adopted guidelines on capital
adequacy for national banks, state
member banks, and bank holding
companies. The guidelines require
small community banks to maintain a
ratio of primary capital to assets of at
least 6 percent and a ratio of total
capital to assets of at least 7 percent.
The Board's policy has thus been revised and requires that the primary
and total capital of the subsidiary
bank of small one-bank holding companies at no time fall below 6 and 7
percent respectively of total assets.

Enforcement of Other Laws
and Regulations
The preceding sections discussed the
supervision of bank safety and sound


ness and the regulation of banking
structure. This section describes the
enforcement of other laws, regulations, and rulings.
Bank Secrecy Act
The Department of the Treasury
relies on System examiners to verify
the compliance of state member banks
and Edge corporations with the Treasury's Financial Recordkeeping and
Reporting Regulation, which implemented the Bank Secrecy Act. The
regulation requires financial institutions to maintain records and reports
on certain transactions of more than
$10,000. One purpose of the law is
to assist law enforcement personnel
in identifying transactions that may
involve funds obtained illegally.
The Federal Reserve, with the
other federal supervisory agencies,
strengthened examination procedures
for verifying compliance with the
Bank Secrecy Act. The procedures,
which were revised in cooperation
with the General Accounting Office
and the Treasury Department, were
incorporated in the System's examination program in early 1981. The procedures focus on a review of the
bank's internal systems and controls
and on the testing of selective transactions for ensuring compliance with
the statute.
Financial Disclosure by
State Member Banks
The Board's Regulation F deals with
the disclosure requirements for state
member banks that have securities
registered under the Securities Exchange Act of 1934. Seventy-three
state member banks, most of which
are of small or medium size, were
registered with the Board under this
regulation. These institutions must
file certain materials, such as finan-

Banking Supervision and Regulation
cial reports and proxy statements,
that are of interest to investors. The
Board's staff reviews these filings for
compliance with the regulation.
The disclosure rules under Regulation F are substantially similar to
those issued by the Securities and
Exchange Commission.
Effective
March 9, 1981, the Board adopted
amendments to this regulation to conform with recent rule changes made
by the SEC.
Loans to Executive Officers
Under section 22 (g) of the Federal
Reserve Act, state member banks
must include with their quarterly report of condition a list of loans to
executive officers during the quarter.
The table at the bottom of the page
summarizes these data for 1981.
Applications by State Member Banks
The Board's authority over state
member banks covers the authorization of new branches, investments in
bank premises that exceed 100 percent of capital stock, additions to the
capital base from sales of subordinated debt, and waiver of the six
months' notice of intention to withdraw from membership in the System. The Federal Reserve employs
the applications or notifications process to administer these statutory provisions.
With few exceptions, these matters
are handled under delegated authority
by the Federal Reserve Banks, or, in
the case of proposed sales of subordi-

nated debt, by the Director of the
Board's Division of Banking Supervision and Regulation.
Stock Repurchases by
Bank Holding Companies
A stock repurchase occurs when a
bank holding company purchases its
own shares from existing shareholders. Often such purchases are
financed through borrowings, so that
the net effect of the transaction is to
increase bank holding company debt
at the very time that its equity is
decreased. Because relatively large
repurchases may adversely affect the
financial condition of a bank holding
company and its bank subsidiary, the
Board, by regulation, requires holding
companies to give advance notice of
repurchases that retire 10 percent or
more of their consolidated equity
capital.
The Federal Reserve reviewed 107
such notifications during 1981, all of
which were acted on by the Reserve
Banks on the Board's behalf.
Securities Regulation
Under the Securities Exchange Act of
1934, the Board is responsible for
regulating credit used to purchase or
carry securities. In fulfilling its responsibility under the 1934 act, the
Board imposes limitations on the
amount of credit that may be provided
by securities brokers and dealers
(Regulation T), by banks (Regulation U), and by other lenders (Regu-

Total loans to executive officers
Number

Amount (dollars)

Range of
interest rates
charged
(percent)

1,128
1,124
1,254

6,206,655
6,569,274
8,870,316

4-24
6-23
5-26

Period covered
January 1—March 31
April 1-June 30
July 1-September 30



191

192

Banking Supervision and Regulation

The Board published revised lists
lation G). Regulation X extends
these credit limitations, or margin re- of OTC stocks subject to its margin
quirements, to certain borrowers and regulations on April 6 and October 5,
certain credit extensions, such as 1981. The April list consisted of
credit obtained from foreign lenders 1,307 stocks, while the October list
consisted of 1,407. The Board's Diby U.S. citizens.
The SEC, the National Association vision of Banking Supervision and
of Securities Dealers, and the national Regulation monitors the market activsecurities exchanges examine brokers ity of all OTC stocks to determine the
and dealers for compliance with Regu- stocks that should be placed on this
lation T. The three bank supervisory list.
Stocks must meet certain criteria,
agencies examine banks for compliance with Regulation U, with the established by the Board, before they
Board being responsible for state can be eligible for the OTC Margin
member banks that extend stock- Stock List. On November 19, 1981,
secured credit for the purpose of the Board proposed for comment
amendments to those criteria. The
buying margin stock.
The Board, the National Credit Board's proposal would eliminate the
Union Administration, and the Farm current requirement that an issuer be
Credit Administration examine other organized under the laws of the
lenders under their respective juris- United States or a state, thereby
dictions for compliance with Regula- making OTC stocks of foreign issuers
tion G. At the end of 1981, there eligible for margin credit if they meet
were 513 such lenders, 278 of which the other criteria for listing. In addiwere subject to the Board's super- tion, the Board's proposal would revision. During the year, Federal Re- place certain alternative criteria with
serve examiners inspected 138 lend- mandatory requirements. Finally, this
ers that were subject to Regulation G proposal would relax existing financial
(these lenders are inspected on a criteria to make them resemble more
biennial basis) for adherence to its closely requirements established by
major exchanges.
margin requirements.
Significant amendments and proRegulations G and U, in general,
impose credit limitations on banks posals to amend the margin regulaand other lenders only when the pur- tions were made in 1981. On June 9,
pose of a loan is for the purchase or 1981, the Board amended Regulation
carrying of publicly held equity se- T to make clear that the speculative
curities and the loan is secured by holding of foreign currency, including
such securities. Regulation T limits gold coins, in a margin account is not
the amount of credit that brokers and permissible, and that any transactions
dealers may extend based on the value in foreign currency should be effected
of securities serving as collateral. in accounts insulated from securities
This collateral must consist of stocks credit transactions.
On June 18 and July 10, 1981, the
and bonds traded on national securities exchanges or certain over-the- Board issued for public comment macounter (OTC) stocks and bonds that jor revisions to Regulations G, T, and
the Board designates as having char- U as part of the Regulatory Improveacteristics similar to those of stocks ment Project. These proposals would
simplify the account structure of RegDigitizedlisted on national exchanges.
for FRASER


Banking Supervision and Regulation
ulation T, relax certain restrictions on
broker-dealer activities, reduce compliance burdens for banks and other
lenders, and simplify the language
used in the margin regulations.
On October 5, 1981, the Board
adopted an amendment to Regulation
T establishing a separate initial margin requirement for customers who
write uncovered options on government securities. The margin is to be
based on the maintenance margin requirement of the exchange that trades
the option. Without this amendment
to Regulation T, brokers and dealers
would have been subject to the existing rule for options, which was intended to apply only to options written on corporate equity securities.
Finally, on November 5, 1981, the
Board issued for public comment an
amendment to Regulation T that
would permit brokers or dealers to
use U.S. government securities or
irrevocable letters of credit as collateral when they borrow or lend
securities. The present regulation
requires a deposit of cash as collateral.
Federal Reserve Membership
At the end of 1981, 5,474 banks were
members of the Federal Reserve
System, a net increase of 52 from the
previous year. Member banks operated 25,761 branches on December 31, 1981, a net increase of 1,382
for the year.
Member banks accounted for 37
percent of all commercial banks in
the United States, and for 64 percent
of commercial banking offices. Completefigureson changes in the number




193

of banks and banking offices by
charter class are provided in table 18
in the Statistical Tables section of this
REPORT.

Regulatory Improvement
Project and Review of
Reporting Requirements
The Board's regulations are reviewed
on a regular basis, under the Regulatory Improvement Project, and regulations are eliminated, reduced, or
simplified as consistent with the law
and the public interest. Reporting
requirements imposed by the Board
were reviewed under the Paperwork
Reduction Act of 1980. In continuing the efforts, begun during 1980 to
reduce the reporting burden on transfer agents, the Board, together with
the other supervisory agencies,
extensively revised the registration
statements that transfer agents must
file. In addition, the Board undertook
specific reviews and eliminated certain
reporting requirements under Regulation P and modified other supervisory
reports.
The Board has also endorsed recommendations of the Examination
Council to eliminate certain reporting
requirements established by the Financial Institutions Regulatory and
Interest Rate Control Act of 1978.
Details on the Regulatory Improvement Project and the review of
reporting requirements are provided
in the following sections of this REPORT: "Record of Policy Actions of
the Board of Governors," "Legislative Recommendations," and "Regulatory Simplification."

194

Regulatory Simplification
This report, required by section 805
of the Financial Regulation Simplification Act of 1980, reviews action
taken by the Board of Governors to
comply with that act. It also discusses the Board's efforts under the
Regulatory Flexibility Act and the
Board's Statement of Policy Regarding Expanded Rulemaking Procedures. Compliance with these acts
and the Board's policy statement is
intended to improve regulation.
Basically, the Financial Regulation
Simplification Act (Title VIII of the
Depository Institutions Deregulation
and Monetary Control Act of 1980)
requires that each federal financial
regulatory agency assure that its future regulations impose no more
burdens than necessary, are adopted
only after interested persons are heard,
and are written simply and clearly.
The act also requires that each agency
establish a program to assure periodic
review of its regulations to determine
whether the regulations meet these
objectives.

In addition, the Federal Reserve
has cooperated with the other financial regulatory agencies through the
Federal Financial Institutions Examination Council to avoid conflicts, duplication, and inconsistencies among
regulations.
The Board's regulatory activities
during 1981 have concentrated on reserve requirements of depository institutions and interest on deposits
(Regulations D and Q), home mortgage disclosure (Regulation C), truth
in lending (Regulation Z), and securities credit transactions (Regulations G, T, U, and X). Regulations
of home mortgage disclosure and
truth in lending were revised as required respectively by congressional
extension of the Home Mortgage
Disclosure Act and by the Truth in
Lending Simplification and Reform
Act. Work on regulation of securities
credit transactions is being conducted
in accordance with the periodic reviews mandated in the Simplification
Act and the Regulatory Flexibility
Act and with the Board's periodic
review program, which predated the
acts.

Progress during 1981
Proposed and final regulatory actions
presented for the Board's considera- Board Actions and Staff Work
tion in 1981 were reviewed by the
staff of the Regulatory Improvement Reserve Requirements
Project, which has responsibility for (Regulation D)
implementing the objectives of the On two occasions the Board extended
Simplification Act. The staff also co- for six months the deferral of reordinated periodic reviews of several serve and reporting requirements for
Board regulations and continued or any nonmember depository institubegan work on other regulatory mat- tion with total deposits of less than
ters not yet brought to the Board for $2 million. This deferral affected
nearly 18,000 depository institutions,
action.



Regulatory Simplification
mostly credit unions, which hold only
V2 to 1 percent of all reservable deposits. Thus, for those institutions,
the burden of maintaining reserves
and reporting has been temporarily
eliminated. In the interest of minimizing regulatory burdens on small institutions, the Board requested that the
Congress enact legislation that would
permanently exempt small institutions
from reserve requirements.
In addition, the Board sought public comment on a staff proposal to
introduce essentially contemporaneous reserve requirements on transaction accounts for medium-sized and
large depository institutions. Consistent with requirements of the Simplification Act, the Board asked for estimates of the cost of altering deposit
information systems and for information on the complications for an institution of managing a contemporaneous
reserve system.
Interest on Deposits (Regulation Q)
After considering public comment, the
Board clarified, through an interpretation, that individuals may hold negotiable order of withdrawal (NOW) accounts regardless of the purposes that
the funds in these accounts will serve.
The Board decided that the burden of
distinguishing between personal and
business accounts could not be justified because making such distinctions
would be impracticable. Also, the
Board broadened the eligibility to
hold NOW accounts to a wide range
of organizations that are specified as
nonprofit in the Internal Revenue
Code and to governmental units, regardless of organizational form, when
they use NOW accounts solely for
educational or medical purposes. This
action minimizes problems of inter


195

pretation that had been burdensome
to the public.
International Banking Facilities
(Regulations D and Q)
After extensive discussion in open
meetings and after public comment,
the Board amended Regulations D
and Q to permit depository institutions to establish international banking facilities in the United States.
Deposits at these facilities, which must
conduct an essentially international
business, are exempt from reserve requirements and from the usual interest-rate limits. The Board's efforts
were directed at permitting depository
institutions to compete from U.S.
offices with the Euromarkets while
at the same time maintaining the
effectiveness of its monetary policy
instruments. To monitor the impact
on monetary policy of this relaxation
in regulatory restriction, the Board
also adopted reporting requirements
for banks establishing these facilities.
Home Mortgage Disclosure
(Regulation C)
The Board revised its regulation on
the reporting of home mortgages. The
language and substance of the new
regulation are simplified, and the disclosures now required are believed
to be the most useful that can be provided at reasonable cost.
The Board advised the Congress
that the burden could be further reduced if the Home Mortgage Disclosure Act prescribed an exemption level
based on an institution's portfolio of
home mortgages. The present exemption level, which is based on the size
of total assets, precludes granting relief to several thousand small institu-

196

Regulatory Simplification

tions that are relatively inactive in
residential financing.

Truth in Lending (Regulation Z)
Under authority granted by the Truth
in Lending Simplification and Reform
Act, the Board (1) reduced the
number of required truth-in-lending
disclosures; (2) made creditor compliance easier, especially by providing model forms; (3) limited civil
liability of creditors to certain important disclosures; (4) emphasized
administrative enforcement rather
than private litigation, which had contributed to complex rules and court
decisions; and (5) clarified complex
legal questions that produced conflicting court decisions in the past.
The Board simplified Regulation Z
further by (1) providing clearer definitions and standards of applicability;
(2) making good-faith compliance
easier by establishing tolerances for
small errors in some disclosures; (3)
reducing the number of disclosures
unrelated to credit decisionmaking;
(4) allowing creditors greater flexibility in preparing disclosures to fit
the nature of a transaction; and (5)
redrafting the language and reorganizing the regulation for clarity and convenience.
Despite the costs of adjusting to the
simplified regulation, each major
change should produce net consumer
benefits by substantially reducing the
regulatory burden without sacrificing
important consumer protections. Possibly the most important single contribution is the provision of model
forms that, if used properly, guarantee compliance with the federal law.
The burden on institutions of obtaining information to comply with



Regulation Z will be reduced by the
publishing and periodic updating of
an Official Staff Commentary. The
commentary, which replaces more
than 1,500 individual staff interpretations, provides an organized comprehensive body of information in
relatively simple language. Moreover,
it protects from civil liability any
creditor who acts in conformity with
it.
Later in 1981, the Board asked for
public comment on a proposal to
amend the definition of "arranger of
credit" so as to require real estate
brokers to provide truth in lending
disclosures to buyers of residential
property when sellers are providing
some or all of the financing. The proposal would have brought under regulation nearly all real estate brokers
and sales persons who are involved
with seller-financed transactions. It
would also have made sellers potentially liable for disclosure errors under
the Truth in Lending Act. In February 1982, after receiving public comment, the Board did not adopt the
proposal and excluded real estate
brokers and sales persons from the
definition. The Board intends to review this action early in 1983, depending on whether the Congress
clarifies the statutory intent.
Consumer Leasing (Regulation M)
The consumer leasing provisions formerly in Regulation Z were made into
a separate Regulation M without substantive modification. The Board issued for comment a proposed Official
Staff Commentary intended to apply
and to interpret Regulation M. The
commentary will be revised in light
of public comment and further staff
work.

Regulatory Simplification

Electronic Fund Transfers
(Regulation E)
Compliance with the regulation on
electronic fund transfers is facilitated by publication of an Official
Staff Commentary on Regulation E.
The commentary is designed to make
compliance easier by providing specific answers, in nontechnical language, to commonly asked questions.
It also provides protection from civil
liability for institutions that comply
with it.

Securities Credit Transactions
(Regulations G, T, U, and X)
In 1981, the Board published for
comment proposals for a comprehensive revision of the regulations that
control the use of credit in the purchasing of financial instruments. In
January 1982, the Board adopted
those proposals that called for greater
freedom for brokers and dealers to
offer financing in conjunction with
investment banking services; for
changes that narrow the differences
in regulation of lending by banks and
by lenders who are neither banks nor
brokers or dealers; for elimination of
"equity building" devices so that investors have greater latitude to reallocate their portfolios; and for reduction in the coverage of the U - l
report form. Other proposals being
developed for final action in 1982
include reorganization of the account
structure required at brokerage firms
and redrafting of the regulations (including use of terminology consistent
with industry usage). These proposals simplify and clarify various
complex provisions.
Separately, the Board, after receiving public comment on alterna


197

tive proposals, adopted a "good
faith" margin requirement for customers who write uncovered options
on government securities. Thus Regulation T now provides for each exchange, rather than the Board, to set
the amount that writers of these
options must deposit with brokers and
dealers.
The Board also published for comment a proposal to permit brokers
and dealers to use irrevocable letters
of credit as collateral in the ordinary
course of business, for example, when
borrowing securities to complete short
sales or to settle transactions when
securities expected to be delivered
have not been delivered. Use of
letters of credit is viewed favorably
by the industry and can be expected
to reduce the net cost of credit used
by brokers and dealers in clearing
transactions.

Bank Holding Companies and
Change in Bank Control
(Regulation Y)
The Board added to the list of permissible nonbanking activities in
which bank holding companies may
engage and is considering further additions. Staff work continued on a
complete revision of Regulation Y
under the Board's Regulatory Improvement Project. This work has
focused on eliminating applications
whenever possible and improving system processing of required applications. Several regulatory proposals
and requests that have been outstanding for some time are also being considered. In addition, the regulation
will incorporate a number of Board
and staff rulings; and it will be reorganized and redrafted for clarity
and convenience. A proposed regula-

198

Regulatory Simplification

tion for the Board to consider and to
publish for comment is expected in
early 1982.
Management Official Interlocks
(Regulation L)
The Board approved proposed
amendments to simplify, clarify, and
relax the rules that generally prohibit
any person from serving as a management official of two or more nonaffiliated depository institutions in the
same local area. But the proposals
will not be published for comment
until changes are made to incorporate
a recent legislative amendment that
clarifies the grandfather rights of current management officials.
Among other things, the proposed
amendments would aid institutions,
especially small ones, that face a disruptive loss of management because of
the Depository Institutions Management Interlocks Act. They also would
eliminate the need for an institution
to apply for the statutory maximum
grace period in which to terminate
any interlock that becomes prohibited
in the future because of changes in
circumstances.
Minimum Security Devices and
Procedures (Regulation P)
In separate actions, the Board
amended Regulation P, as recommended by the Federal Financial Institutions Examination Council, to
eliminate two report forms that state
member banks were required to file.
The forms concerned security devices
and bank robberies and burglaries.
They served no regulatory purpose
because the information is available
to the Federal Reserve through other
documents and examinations.




Regulatory Service
During 1981, the Board published and
distributed to subscribers both the
Federal Reserve Regulatory Service
and separate handbooks on consumer
and community affairs, on monetary
policy and reserve requirements, and
on securities credit transactions. The
Regulatory Service provides in a
single publication all Board regulations, interpretations, and rulings, as
well as statutory provisions and the
background for, and a summary of,
each regulation. Each handbook,
which is designed to meet the needs
of specialists, contains the same information in its area as the Regulatory
Service. These publications have improved the accessibility and usefulness of Board regulatory materials
to the public.
Survey of Costs and Benefits of
Consumer-Protection Reguations
The Board conducted a voluntary
survey of banks and other depository
institutions to gather data on the benefits of three consumer protection
regulations—Regulations E, B, and
Z—and on the incremental cost to
those institutions of complying with
them. Survey results have been received and edited. The data will be
tabulated and analyzed in 1982.
Also, the Board, working through
the Survey Research Center of the
University of Michigan, conducted
surveys to elicit consumers' perceptions of truth in lending, electronic
fund transfers, equal credit opportunity, and delayed availability of funds
deposited in savings and transaction
accounts. Analysis of the results is
expected to provide a firmer basis for
simplifying regulation in these areas
and making it more effective.

199

Federal Reserve Banks
Pricing of Services
In compliance with the Monetary
Control Act of 1980, the Federal
Reserve Banks began charging in
1981 for certain financial services.
On the date the Federal Reserve began charging for a service, that service
became available to all depository
institutions. Member and nonmember
institutions alike are subject to the
same fee schedules and terms of
service, as required by the act.
To permit a smoother transition to
the pricing environment for both the
Federal Reserve and the private sector, fees were phased in gradually.
The fees for wire transfers and for
net settlement, the first to be introduced, became effective on January 29, 1981, well in advance of the
statutory requirement that pricing
begin not later than September 1,
1981.
When appropriate, national fee
structures have been adopted; otherwise, the fees have been set by Federal Reserve District or office. The
accompanying table indicates the type
of fee structure for each service and
the effective date of pricing.
In accordance with the fee schedule
announced by the Board of Governors
in December 1980, pricing for services other than float was fully implemented by January 1982. The
Board also announced in 1980 a plan
to reduce Federal Reserve float
through operational improvements in
the collection process, primarily for
checks. Such improvements have reduced average daily float 50 percent
between 1979 and 1981; the fees for




Pricing of Federal Reserve Services
Service
National fees
Wire transfer
Net settlement
Automated clearinghouse1

Effective date
January 29,1981
January 29, 1981
August 1,1981

Federal Reserve District or

office fees

Check clearing and
collection
Safekeeping, transfer, and
purchase and sale of
securities
Noncash collection
Transportation of
currency and coin —
Coin wrapping

August 1,1981
October 1,1981
October 1,1981
January 28,1982
January 28,1982

1. The Federal Reserve Bank of New York
has a separate fee structure because the New
York Automated Clearing House is privately operated, whereas all other automated
clearinghouses are operated by the Federal
Reserve.

Federal Reserve services reflect the
cost of these efforts. Other operational and administrative measures to
reduce float are under study, and development of specific alternatives for
explicit pricing of float will continue
in 1982.
In February 1981, the Board
adopted uniform procedures for the
administration of pricing to supplement the pricing principles announced
by the Board on December 31, 1980:
1. Clearing balances. Clearing
balances were designed to establish
account relationships between depository institutions and the Federal Reserve Banks when reserve balances
are not maintained or are inadequate
to support the desired volume of
priced services. Earnings credits accrue on required clearing balances at
the federal funds rate, and can be

200

Federal Reserve Banks

used only to pay for priced services.
At the end of 1981, 579 institutions
had established clearing balances, and
required clearing balances totaled
$117 million.
2. Statements, payments, and billing cycles. The Board issued guidelines for information on statements of
charges for Federal Reserve services
and procedures for payment by depository institutions. The Board also
established monthly billing cycles that
are consistent with reserve maintenance periods and a schedule for statements and payments for services.
3. Administration of pricing. To
develop a common framework for
pricing decisions while permitting Reserve Banks to respond to local conditions, the Board adopted interim
administrative procedures for the
phasing-in of pricing. A policy committee, consisting of representatives
from the Reserve Banks and the
Board, was established to advise the
Board on major pricing issues.
Total revenue for priced services
provided in 1981 was $154.1 million.
Because pricing was initiated on
January 29 and was phased in over
the year, revenues for the full year
were not realized on any service in
1981. Revenue from priced services
has been running below target levels
for the year, and the shortfall is attributable primarily to declines in
volume that led to increases in shortrun unit costs. The Board expects
that during the fourth quarter of 1982,
revenues and costs will generally be
brought into balance. Revenues from
services were collected either through
debits to accounts at the Federal Reserve Banks or through the application of earnings credits on clearing
balances; $4 million in such credits



were applied to charges for services
provided in 1981.
One of the primary objectives of
the Monetary Control Act is to foster
a more efficient payments mechanism.
Before passage of the act, the Federal
Reserve offered payments services
without charge to member banks.
Now, explicit pricing of these services
is fostering efficiency because it gives
depository institutions incentives to
use services in cost-effective ways,
and because it gives private sector
providers of payments services new
opportunities to compete.
The potential for a shift toward
more efficient use of resources can
be seen in the clearing of commercial
checks, which, in terms of resource
use, is the largest payments service
offered by the Federal Reserve Banks.
As the chart shows, the volume of
checks processed by the System had
been growing steadily; then, beginning
in mid-1981, the numbers began to
decline. By the end of 1981, the daily
number processed had fallen to about
50 million checks, 22 percent fewer
than the comparable figure for 1980.
Institutions were making greater use
Check Processing
Millions of checks

Daily averages

50

1979

1980

1981

Federal Reserve Banks
of processing resources outside the
System, apparently in response to the
pricing of Federal Reserve check services, and more checks were being
collected through channels other than
the Federal Reserve, such as through
local clearinghouses. To the extent
that these developments contribute to
a more efficient allocation of resources
in the payments mechanism, one of
the objectives of the Monetary Control Act has been achieved.
Developments in
Payments Mechanism
The volume of payments by checks
and through automated clearinghouses (ACHs) continued to increase
during 1981. Last year, total check
volume cleared by Federal Reserve
Banks expanded by 0.6 percent to
16.6 billion items, an increase that
was somewhat smaller than normal,
mainly because of the initiation of
charges for check services. ACH volume increased 32 percent to 300 million payments cleared in 1981. This
advance reflects the continued expansion of government and commercial
direct-deposit programs and the growing public acceptance of these programs.
Federal Reserve check float decreased from a daily average of
$4.2 billion in 1980 to an average of
$2.8 billion in 1981. This reduction
reflects the continuing efforts of the
System to reduce float and to implement improvements that are consistent with a plan adopted by the Board
in 1980.
During 1981, pricing for Federal
Reserve services was implemented in
compliance with the Monetary Control Act of 1980 and in accordance
with pricing principles adopted by the



201

Board. The services that were priced
during 1981 were wire transfer of
funds and net settlement; check collection and ACH clearing service;
securities safekeeping; purchase and
sale of securities; and noncash collection. The prices for these services
will be reviewed at least annually to
ensure that they cover the Federal
Reserve's costs, and a private-sector
adjustment factor.
Work proceeded on a replacement
network for the Federal Reserve
Communications System, with the
award of a contract for its development and installation. Completion is
expected in 1983. Unlike the system
currently in use, the new one will be
decentralized, and it will be more
versatile. It will serve to transfer research data in support of monetary
policy, as well as to transfer funds and
U.S. government securities.
The operating hours for the transfer
and settlement of funds that are transmitted over the System's wire network
were extended as planned in 1981.
This change made hours uniform
nationwide and affords a separate
period at the end of the day for depository institutions to settle their reserve
accounts.
Examination
The Board's Division of Federal Reserve Bank Operations examined the
12 Reserve Banks and their 25
branches during 1981, 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 Federal Reserve System
Open Market Account and the foreign currency operations conducted

202

Federal Reserve Banks

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 that were
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 annually.
Income and Expenses
The accompanying table summarizes
the income, expenses, and distribution
of net earnings of the Federal Reserve
Banks for 1981 and 1980.
Current income of $15,508 million
in 1981 was 21.1 percent higher than
that in 1980. The principal changes
were increases of $2,072 million in
income on U.S. government obligations and $454 million on foreign
currencies. Income from priced services amounted to $154 million.
Current expenses were $897 million, or 13.4 percent more than in
1980. Assessments for expenditures
of the Board of Governors amounted
to $63 million.
The profit and loss account showed
a net deduction of $369 million,
principally because of net losses of
$124 million on sales of U.S. government obligations and of $306 million

on foreign exchange operations. The
foreign exchange loss was attributable
primarily to revaluation of assets to
market exchange rates. Also included
in the account was a recovery of
$76 million that was applicable to
interest and expense on the loan to
the Franklin National Bank, which
was assumed by the Federal Deposit
Insurance Corporation in 1974.
Statutory dividends to member
banks totaled $75 million, $4 million
more than in 1980. 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 U.S. Treasury as
interest on Federal Reserve notes
totaled $14,024 million for the year,
compared with $11,706 million in
1980. This amount consists of all
net income after dividends and the
amount necessary to bring surplus to
the level of paid-in capital.
A detailed statement of the income
and expenses of each Federal Reserve
Bank during 1981 is shown in table 6,
and a condensed historical statement
appears 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 "Financial Statements," 205-10.

Income, Expenses, and Distribution of Net Earnings
of Federal Reserve Banks, 1981 and 1980
Thousands of dollars
Item
Current income
Current expenses
Current net income
Net deduction from current net income
Earnings credits applied in payment of priced services
Assessments for expenditures of Board of Governors
Net income before payments to U.S. Treasury
Dividends paid
Payments to U.S. Treasury (interest on Federal Reserve notes)
Transferred to surplus



1981

1980

15,508,350
897,114
14,611,236
368,873
4,006
63,163
14,175,194
74,574
14,023,723
76,897

12,802,319
791,157
12,011,162
115,386
62,231
11,833,545
70,354
11,706,370
56,821

Federal Reserve Banks
Federal Reserve Bank Premises
During 1981, the Federal Reserve
Bank of New York sold its surplus
real estate property. With the approval of the Board of Governors, the
Los Angeles Branch acquired property for a future building site; and
the Federal Reserve Bank of Kansas
City acquired adjacent property for
projected future expansion.
Table 8, in the Statistical Tables
section of this REPORT, shows the
cost and book values of bank premises owned and occupied by the
Federal Reserve Banks, and of real
estate acquired for banking-house
purposes.
Holdings of Securities and Loans
The accompanying table presents
holdings, earnings, and average interest rates on loans and securities of
the Federal Reserve Banks during the
past three years.
Average daily holdings of loans
and securities during 1981 amounted
to $132,238 million, an increase of
$2,488 million over 1980. Holdings

203

of U.S. government securities increased $2,558 million; loans and
acceptances decreased $57 million
and $13 million respectively.
The average rates of interest on
holdings increased from 9.73 to 11.13
percent on U.S. government securities, from 12.39 to 14.38 percent on
loans, and from 13.43 to 15.70 percent on acceptances.
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 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

Securities and Loans of Federal Reserve Banks, 1979-81
Item and year

Total

U.S.
government
securities1

Loans

Acceptances

Millions of dollars
Average daily holdings2
1979
1980
1981
Earnings
1979 ...
1980 ...
1981 ...

119,134
129,750
132,238

117,564
128,196
130,754

1,338
1,420
1,363

232
134
121

10,237
12,673
14,766

10,071
12,479
14,551

141
176
196

25
18
19

10.54
12.39
14.38

10.86
13.43
15.70

Percent
Average interest rate
1979
1980
1981

8.59
9.77
11.17

1. Includes federal agency obligations.
2. Based on
 holdings at opening of business.


8.57
9.73
11.13

204

Federal Reserve Banks

the guaranteeing agencies under the
Board's Regulation V. The maximum rate of interest that a financing
institution may charge for a V-loan is
the rate that institution currently
charges its most creditworthy business
customers for loans of comparable
maturity (unless the governmental
guarantor decides that a particular
loan bearing a higher rate of interest
is necessary for national defense
purposes).
As of December 31, 1981, only
three guaranteed loans, totaling




$1,412,333, were outstanding. Of
that amount, $368,465 was guaranteed.
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 1978-81, and table 10 shows the
cost of the larger operations of the
Reserve Banks.

205

Board of Governors
Financial Statements
The accounts of the Board for the
years 1981 and 1980 were examined

by Arthur Andersen & Co., independent public accountants.

AUDITORS' REPORT

To the Board of Governors of the
Federal Reserve System:
We have examined the balance sheets of the Board of Governors of the Federal
Reserve System as of December 31, 1981 and 1980, and the related statements
of assessments and expenditures and changes in financial position for the years
then ended. Our examinations were 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.
In our opinion, the financial statements referred to above present fairly the
financial position of the Board of Governors of the Federal Reserve System as
of December 31, 1981 and 1980, and the results of its operations and the changes
in its financial position for the years then ended, in conformity with generally
accepted accounting principles applied on a consistent basis.
Arthur Andersen & Co.
Washington, D.C.,
February 19, 1982.




206

Financial Statements
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEETS

As of December 31,
1981

1980

OPERATING FUND

Cash
Receivables and advances
Stockroom and cafeteria inventories at lower of cost
(first-in, first-out) or market
Deferred publication costs (Note 3)
Total operating fund

$ 6,164,961
634,532

$

911,190
1,339,004

240,040
334,562
7,374,095

155,456
285,132
2,690,782

Land and improvements
Buildings
Furniture and equipment
Computer equipment

1,301,314
60,787,084
8,085,073
5,893,872

1,297,829
60,337,691
7,734,515
5,892,842

Total property fund

76,067,343
$ 83,441,438

75,262,877
$ 77,953,659

$ 2,484,847
1,372,466
2,694,966

$ 2,280,725
740,093
2,479,622

6,552,279

5,500,440

PROPERTY FUND, at cost (Note 1)

LIABILITIES AND FUND BALANCES
OPERATING FUND

Liabilities
Accounts payable
Accrued payroll and related taxes
Accrued annual leave (Note 1)
Commitments and contingencies (Notes 1, 2, and 4)
Fund balance (Note 1)
Balance, beginning of year
Prior period adjustment to record
accrued annual leave (Note 1)
Assessments over funded expenditures
and unfunded accrued annual leave
Balance, end of year
Total operating fund

(2,809,658)

(1,186,593)

—

(2,037,466)

3,631,474
821,816

414,401
(2,809,658)

7,374,095

2,690,782

75,262,877
852,955
(48,489)

72,396,637
6,560,478
(3,694,238)

PROPERTY FUND (Note 1)

Fund balance
Balance, beginning of year
Additions—at cost
Disposals—at cost
Total property fund

76,067,343
$ 83,441,438

The accompanying notes are an integral part of these balance sheets.




75,262,877
$ 77,953,659

Financial Statements

207

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF ASSESSMENTS AND EXPENDITURES
For the years ended December 31,
1981
1980
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

$ 63,162,700

$ 62,230,800

84,859,336
148,022,036

71,440,704
133,671,504

41,014,846
6,227,869
1,591,343
347,152
1,179,604
1,791,588
867,466
862,981
655,030
560,350
1,273,657
442,897
788,394
173,693
_
690,950
58,467,820

37,069,785
9,835,780
1,585,661
675,718
746,497
1,651,924
791,098
685,918
641,658
509,892
966,949
391,384
489,082
162,870
443,494
56,647,710

848,062

4,726,533

84,859,336
144,175,218

71,440,704
132,814,947

3,846,818

856,557

215,344

442,156

FUNDED EXPENDITURES (Note 1)

Board expenses
Salaries
Retirement and insurance contributions (Note 2)
Travel
Professional fees
Contractual services
Printing and binding
Equipment, office space, and other rentals (Note 4) ...
Telephone and telegraph
Postage
Stationery, office, and other supplies
Heat, light, and power
Cafeteria operations, net
Repairs and maintenance
Books and subscriptions
Other
Board property additions, net of recoveries on disposals
of $4,893 in 1981 and $1,833,945 in 1980 (Note 1)
Expenditures for printing, issuance, and redemption
of Federal Reserve notes on behalf of
the Federal Reserve Banks (Note 1)
Total funded expenditures
Assessments over funded expenditures
UNFUNDED ACCRUED ANNUAL LEAVE (Note 1)
ASSESSMENTS OVER FUNDED EXPENDITURES AND
UNFUNDED ACCRUED ANNUAL LEAVE

$

3,631,474

The accompanying notes are an integral part of these statements.




$

414,401

208

Financial Statements
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF CHANGES IN FINANCIAL POSITION
For the years ended December 31,
1981

1980

$ 63,162,700

$ 62,230,800

84,859,336
4,893
148,026,929

71,440,704
1,833,945
135,505,449

58,467,820

56,647,710

84,859,336

71,440,704

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
Total sources
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 equipment

INCREASE (DECREASE) IN CASH

CASH BALANCE, beginning of year
CASH BALANCE, end of year

—
199,512
483,309
5,877,657

852,955
Decrease (increase) in accounts payable, accrued
payroll and related taxes
Increase (decrease) in receivables, inventories, and
deferred costs
Total applications

3,485
451,216
397,224
1,030

6,560,478

(836,495)

650,938

(570,458)
142,773,158

1,066,191
136,366,021

5,253,771

$ 6,164,961

The accompanying notes are an integral part of these statements.




(860,572)

911,190

1,771,762
$

911,190

Financial Statements
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1981 AND 1980
(1)

SIGNIFICANT ACCOUNTING POLICIES

In preparing its financial statements, the
Board of Governors of the Federal Reserve
System (the Board) has applied accounting
principles which, in management's 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 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.
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 and the property fund
balance accounts in the Property Fund are
increased or decreased at cost.
Accounting for Employee Annual Leave—
In accordance with Statement of Financial
Accounting Standards No. 43, "Accounting for
Compensated Absences," the Board's policy
with regard to accounting for employee annual
leave was changed in 1981. As the Statement
prescribes, the Board now records the liability
for employees' rights to receive compensation
for annual leave in the financial statements.
Accordingly, the accompanying financial statements for 1980 have been restated to reflect
the liability for vested employee annual leave
as of December 31, 1979, and for the incremental expense for 1980. The current year
incremental expense for this liability is presented in the accompanying Statements of
Assessments and Expenditures.



(2)

209

RETIREMENT PLANS

There are two major retirement plans for
employees of the Board. Approximately 86
percent 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 federal government are
covered by this plan. The second plan, the
Civil Service Retirement Plan, covers all new
employees who come directly from federal
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 directly match employee payroll
deductions. Under the Federal Reserve Board
Plan, the Board's contributions for active
employees are actuanally determined and are
funded in the current period.
The Board's contributions to the retirees'
Cost-of-Living Adjustment (COLA) totaled
$878,000 in 1981 and $4,550,000 in 1980. The
significant decrease in the level of these contributions was primarily attributed to a change
in two elements of the Board's policy regarding
the retirees' COLA.
• Prior to 1981, following federal government practice, the total cost of the retirees'
COLA was computed and funded semiannually using a terminal funding method.
Consistent with congressional actions taken
in 1981, the COLA is now computed and
funded on an annual basis.
This change in the method of computing
the retirees' COLA had a significant impact
on the level of the Board's funding in 1981.
The first semiannual payment was made in
March 1981 and reflected the change in the
consumer price index that occurred during
the six months ended December 31, 1980. The
second semiannual payment, which would
have covered the first six months of 1981,
was eliminated. (The second semiannual
payment made in 1980 was $2,600,000.)
This reduction in payments, however, is a
one-time occurrence since the annual payment to be made in 1982 will reflect changes
in the consumer price index that occurred during the twelve months ended
December 31, 1981.
• As previously stated, prior to 1981, the
Board terminally funded the entire amount
of the COLA in the current period. In
1981, this policy was changed so that onehalf of the annual COLA contribution is
now currently funded by a lump sum payment with the balance of the contribution
funded by payments made over a period
of fifteen years, as actuarially determined.
(In 1981, contributions of $712,000 were
deferred.)

210

Financial Statements

Additionally, employees of the Board participate in the Federal Reserve System's Thrift
Plan. Under this plan, the Board contributes
a fixed percentage of allowable employee savings to employee savings accounts.
Board contributions to all retirement plans
totaled approximately $5,338,000 in 1981 and
$9,110,000 in 1980.
As of January 1, 1981 and 1980 (the dates
of the most recent actuarial reviews), the accumulated plan benefits for the Federal
Reserve Board Plan were as follows.
As of January 1,
1981

1980

Actuarial present value
of accumulated
plan benefits
Vested
$43,930,769
Nonvested
2,790,947

$43,991,227
3,161,989

$46,721,716

$47,153,216

The assumed rate of return used in determining the present value of accumulated
plan benefits was 9 percent in 1981 and
8 percent in 1980.
As of January 1, 1981 and 1980, net assets
available for benefits exceeded the actuarial
present value of accumulated plan benefits.
(3)

FEDERAL RESERVE REGULATORY SERVICE

The Board began publication of the Federal
Reserve Regulatory Service in 1981. This
monthly looseleaf service contains Board regulations, interpretations, staff rulings, and other
regulatory materials. The service is distributed
without charge throughout the Federal Reserve
System. It is also sold to depository institutions, legal firms, and others. Subscription
revenues in the amount of $711,490 were recognized in 1981 and used to offset prior years'
development costs and a portion of the current
year publication costs. The remaining publication costs of $334,562 have been deferred and
will be amortized against 1982 subscription
revenues.




(4)

COMMITMENTS AND
CONTINGENCIES

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, 1981, fixed
future rental commitments were approximately
$1,087,000 for 1982.
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 is self-insured with regard to
(1) a group term life and accident insurance
plan for Board officers and (2) losses of its
building and equipment from fire or other
casualties. Coverage for other customarily
insured risks, such as workers' compensation
and comprehensive general liability, is carried
by the Board.
(5)

FEDERAL FINANCIAL INSTITUTIONS
EXAMINATION COUNCIL

The Board is one of five member agencies
of the Federal Financial Institutions Examination Council (the Council). During 1981 and
1980, the Board paid $113,730 and $42,656,
respectively, in assessments for operating expenses of the Council.
The Board serves as custodian for the
Council's cash. It also processes accounting
transactions, including payroll for most employees, and performs other administrative
services for the Council, which are reimbursed.
The Board is not reimbursed for the costs
of personnel who serve on the Council and
on the various task forces and committees of
the Council. The costs associated with these
contributed services are included in the accompanying financial statements.

Siofisaea! Tattles




212

Tables

1. Detailed Statement of Condition of All Federal Reserve
Banks Combined, December 31, 1981
Thousands of dollars

ASSETS

Gold certificate account
Special drawing rights certificate account
Coin
Loans and securities
Loans to depository institutions
Acceptances held under repurchase agreements
Federal agency obligations
Bought outright
Held under repurchase agreements
U.S. government securities
Bought outright
Bills
Notes
Bonds
Total bought outright
Held under repurchase agreement

11,151,256
3,318,000
376,575
1,603,564
194,755
9,125,364
268,910
49,359,015
59,978,412
18,400,517
127,737,944
3,216,090

Total U.S. government securities

130,954,034

Total loans and securities
Cash items in process of collection
Transit items
Other cash items

142,146,627
8,752,734
1,882,978

Total cash items in process of collection
Bank premises
Land
Buildings (including vaults)
Building machinery and equipment
Construction account
Total bank premises
Less depreciation allowance

10,635,712
352,312
124,343
87,140
563,795
156,502

90,888

407,293

Bank premises, net
Other assets
Furniture and equipment
Less depreciation
Total furniture and equipment, net
Denominated in foreign currencies i
Interest accrued
Premium on securities
Due from Federal Deposit Insurance Corporation
Overdrafts
Prepaid expenses
Suspense account
Real estate acquired for banking-house purposes
All other
Total other assets
Total assets




498,181
215,364
68,548

146,816
5,128,423
2,227,841
266,989
428,000
172,327
55,788
182,469
12,189
99,885
8,720,727
176,847,078

Tables

213

I .—Continued

LIABILITIES

Federal Reserve notes
Outstanding (issued to Federal Reserve Banks)
Less held by Federal Reserve Banks

151,032,813
19,127,745

Total Federal Reserve notes, net

131,905,068

Deposits
Depository institutions
U.S. Treasury—general account
Foreign—official accounts
Other deposits
Officers' and certified checks
International organizations
All other 2

25,227,595
4,300,773
504,559
39,682
220,096
531,072

Total other deposits
Deferred availability cash items
Other liabilities
Exchange-translation account
Unearned discount
Discount on securities
Sundry items payable
Suspense account
All other

790,850
8,880,357
—123,961
474
2,705,752
28,441
147,752
1,160

Total other liabilities

2,759,618

Total liabilities

174,288,820
CAPITAL ACCOUNTS

Capital paid in
Surplus
Other capital accounts3

1,279,129
1,279,129

Total liabilities and capital accounts

176,847,078

1. Includes $103.9 million in U.S. government
securities held under repurchase agreement against
receipt of foreign currencies and $1,881.6 million
in foreign currencies warehoused for the U.S.

3. During the year, this item includes undistributed net income, which is closed out on
Dec. 31; see table 7 in the Statistical Tables
section of this REPORT.

y f ^ e
p
account pending payment.

the Federal




' £ » T t£S

2. Statement of Condition of Each Federal Reserve Bank, December 31, 1981 and 1980
Millions of dollars
Item

Total

Boston

1981

1980

1981

11,151
3,318
377

11,161
2,518
397

1,017
165
20

1,604
0

1,594
215

195

New York

1980

Philadelphia

Cleveland

Richmond

1981 |

1980

577
128
27

3,160
951
18

3,013
665
24

531
141
19

560
121
19

805
253
38

847
201
49

1,147
288
46

961
229
42

77
0

106
0

559
0

663
0

212
0

37
17

19
0

70
132

102
0

189
0

776

0

0

195

776

0

0

0

0

0

0

9,125
269

8,739
525

388
0

399
0

2,657
269

2,272
525

327
0

379
0

662
0

660
0

729
0

718
0

Held under repurchase agreements

127,738
3,216

119,299
2,029

5,437
0

5,450
0

37,188
3,216

31,010
2,029

4,571

5,179
0

9,274
0

9,013
0

10,198
0

9,799
0

Total loans and securities

142,147

133,177

5,902

5,955

44,084

37,275

5,110

5,612

9,955

9,875

11,029

10,706

Cash items in process of collection
Bank premises
Other assets
Denominated in foreign currencies 2
All other

10,636
498

15,504
457

313
98

403
100

705
23

2,351
20

397
52

425
53

383
27

479
24

1,730
99

3,035
89

5,129
3,592

5,104
3,177

141
125

145
122

1,386
1,296

1,374
751

191
140

195
151

397
197

414
294

256
222

255
252

0

0

+287

-82

+ 656

+2,859

-256

-837

-1,066

-322

+ 562

+ 219

176,848 171,495

8,068

7,375

52,279

48,332

6,325

6,299

10,989

11,861

15,379

15,788

1981

1980

1981

1980

1981

1980

ASSETS

Special drawing rights certificate account
Loans
Other

Federal agency obligations
Bought outright
Held under reDurchase agreement
U.S. government securities

Interdistrict Settlement Account
Total assets




LIABILITIES

Federal Reserve notes
Deposits
Depository institutions 3
U.S. Treasury—General account
Foreign—Official accounts
All other

131,906

Deferred availability cash items
Other liabilities and accrued dividends 4
Total liabilities

6,995

6,191

39,633

35,601

5,287

5,276

8,972

9,463

12,046

10,786

27,456
3,062
411
617

602
0
9
12

743
0
10
11

5,075
4,301
267
540

6,521
3,062
145
437

664
0
12
10

576
0
14
8

1,259
0
25
20

1,529
0
30
16

1,301
0
16
31

1,637
0
18
24

30,825

31,546

623

764

10,183

10,165

686

598

1,304

1,575

1,348

1,679

8,800
2,759

11,037
2,265

278
106

257
97

949
876

1,384
570

159
89

237
96

339
182

437
196

1,656
197

2,989
210

174,290

I

Total deposits

124,241

25,228
4,301
505
791

169,089

8,002

7,309

51,641

47,720

6,221

6,207

10,797

11,671

15,247

15,664

1,279
1,279
0

1,203
1,203
0

33
33
0

33
33
0

319
319
0

306
306
0

52
52
0

46
46
0

96
96
0

95
95
0

66
66
0

62
62
0

176,848

171,495

8,068

7,375

52,279

48,332

6,325

6,299

10,989

11,861

15,379

15,788

151,033

140,184

7,885

7,007

43,654

38,710

7,374

6,515

9,882

10,225

13,348

12,006

19,127

15,943

890

816

4,021

3,109

2,087

1,239

910

762

1,302

1,220

131,906

124,241

6,995

6,191

39,633

35,601

5,287

5,276

8,972

9,463

12,046

10,786

11,151
3,318
0

11,161
2,518
0

1,017
165
0

577
128
0

3,160
951
0

3,013
665
0

531
141
0

560
121
0

805
253
0

847
201
0

1,147
288
0

961
229
0

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 5
Federal Reserve notes, net 6
Collateral held by Federal Reserve for notes issued to
Bank
Gold certificate account
Special drawing rights certificate account
Other eligible assets
U.S. government and agency securities

117,437

110,562

5,813

5,486

35,522

31,923

4,615

4,595

7,914

8,415

10,611

9,596

Total collateral

131,906

124,241

6,995

6,191

39,633

35,601

5,287

5,276

8,972

9,463

12,046

10,786

For notes see end of table.




2. Statement of Condition of Each Federal Reserve Bank, December 31, 1981 and 1980—Continued
Millions of dollars
Atlanta

Chicago

St. Louis

Minneapolis

Kansas City

1981

1980

1981

1980

1981

1980

1981

1980

1981

436
98
43

465
79
38

1,171
519
23

1,722
411
23

450
129
29

465
106
24

189
48
17

225
42
12

534
154
31

501
111
44

628
192
26

44
0

81
0

399
0

183
3

49
0

51
0

11
0

25
9

60
0

88
50

0

0

0

0

0

0

0

0

0

Held under reDurchase agreement

290
0

317
0

1,393
0

1,373
0

338
0

351
0

136
0

156
0

U.S. government securities
Bought outright 1
Held under repurchase agreement

4,059
0

4,323
0

19,501
0

18,746
0

4,734
0

4,794
0

1,911
0

4,393

4,721 21,293

20,305

5,121

5,196

Cash items in process of collection
Bank premises
Other assets
Denominated in foreign currencies 2
All other

1,571
34

2,041
35

1,730
16

632
14

656
14

377
151

379
157

729
417

151
135

Interdistrict Settlement Account

-434

-392

-930

-967

Total assets

6,669

7,523 24,310

24,386

Item

1980

Dallas
1981

San Francisco

1980

1981

1980

572
132
30

1,083
380
67

1,253
293
65

57
0

46
1

15

55
3

0

0

0

0

0

417
0

409
0

571
0

519
0

1,217
0

1,186
0

2,131
0

5,842
0

5,591
0

7,992
0

7,080
0

17,031
0

16,183
0

2,058

2,321

6,319

6,138

8,620

7,646

18,263

17,427

451
28

699
28

1,212
22

1,521
22

1,528
14

L370

703
70

794
43

150
102

161
52

160
84

216
141

215
126

306
254

294
157

809
411

794
564

-730

-391

-211

-448

+ 767

+401

-187

+ 31

5,931

6,322

2,793

3,123

9,396

10,615 21,599

21,264

ASSETS

Coin
Loans
To deDositorv institutions
Other

.

.

Acceptances held under repurchase agreement
Federal agency obligations




•>..

1,011
17
738 7
468

- 7 1 + 1,542
8,607

13,110

o

LIABILITIES

Federal Reserve notes
Deoosits
Depository institutions3
U S Treasury—General account
Foreign
All other

3,142

3,670 19,534

19,437

4,532

4,835

1,463

1,807

6,652

5,758

8,666

7,198

14,984

14,219

1,842
0
24
8

1,852
0
27
8

3,358
0
47
78

3,495
0
52
39

662
0
10
17

742
0
11
9

764
0
10
3

655
0
11
5

1,422
0
14
15

1,350
0
15
12

2,930
0
20
22

2,312
0
21
19

5,349
0
51
35

6,044
0
57
29

1,874

1,887

3,483

3,586

689

762

111

671

1,451

1,377

2,972

2,352

5,435

6,130

Deferred-availability cash items
Other liabilities and accrued dividend*

1,360
99

1,667
119

554
379

672
337

544
92

569
84

420
39

529
40

1,064
115

1,269
99

1,149
155

790
127

328
430

237
290

Total liabilities

6,475

7,343 23,950

24,032

5,857

6,250

2,699

3,047

9,282

8,503

12,942

180
180
0

177
177
0

37
37
0

36
36
0

47
47
0

38
38
0

57
57
0

52
52
0

84
84
0

7,523 24,310

24,386

5,931

6,322

2,793

3,123

9,396

8,607

13,110

Total deposits

10,467 21,177 20,876

CAPITAL ACCOUNTS

Capital paid in . . . .
Surplus
Other capital accounts
Total liabilities and
capital accounts

97
97
0
6,669

90
90
0

74
74
0

211
211
0

194
194
0

10,615 21,599 21,264

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 5

5,270

5,678 21,111 21,021

5,546

5,606

1,995

2,265

7,891

6,750

10,121

8,216

16,956

2,128

2,008

1,577

1,584

1,014

771

532

458

1,239

992

1,455

1,018

1,972

1,966

3,142

3,670 19,534

19,437

4,532

4,835

1,463

1,807

6,652

5,758

8,666

7,198

14,984

14,219

Collateral held by Federal Reserve Agent for
notes issued to Bank
Gold certificate account
Special drawing rights certificate account
Other eligible assets
U.S. government and agency securities

436
98
0
2,608

465 1 171 1,722
79
519
411
0
0
0
3,126 17,844 17,304

450
129
0
3,953

465
106
0
4,264

189
48
0
1,226

225
42
0
1,540

534
154
0
5,964

501
111
0
5,146

628
192
0
7,846

572
1,083
132
380
0
0
6,494 13,521

1,253
293
0
12,673

Total collateral

3,142

3,670 19,534

4,532

4,835

1,463

1,807

6,652

5,758

8,666

7,198

14,984

14,219

Federal Reserve notes, net6

19,437

1. Includes 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.
2. Includes U.S. government securities held under repurchase agreement against
receipt of foreign currencies and foreign currencies warehoused for the U.S.
Treasury. Assets shown in this line are revalued monthly at market exchange
rates.
3. Includes reserves of all depository institutions.




16,185

4. Includes exchange-translation account reflecting the monthly revaluation at
market exchange rates of foreign exchange commitments.
5. Beginning September 1980, Federal Reserve notes held by the Reserve Banks
are exempt from the collateral requirement.
6. Includes Federal Reserve notes held by U.S. Treasury and by Federal Reserve
Banks other than the issuing Bank.
7. Includes special investment account at Chicago of Treasury bills maturing
within 90 days.

218

Tables

3. Federal Reserve Bank Holdings of U.S. Government and
Federal Agency Securities, December 31, 1979-81
Millions of dollars

U.S. government securities—Total
Within 90 days
91 days to 1 year
1-5 years
5-10 years
Over 10 years
Held outright 1
Treasury bills
Treasury notes—Total
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
June 31, 1980—R '.'.'.'.'.'.'.'.'.,
Aug. 15, 1980—B
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
W
Jan. 31, 1981—P
Feb. 15, 1981—A
C
Feb. 28, 1981—Q
Mar. 31, 1981—H
R
Apr. 30, 1981—S
May 15, 1981—D
M
May 31, 1981—T
June 30, 1981—J
U
July 31, 1981—V
Aug. 15, 1981—F
Aug. 31, 1981—W ''.'.'.'.'. *.'.'.'.'.
Sept. 30, 1981—K
Oct. 31, 1981—Y .!.'.'!.'"!.'!!
Nov. 15, 1981—B
G
Nov. 30, 1981—Z
Dec. 31, 1981—L
AB
Jan. 31, 1982—N
Feb. 15, 1982—D
Feb. 28, 1982—P
Mar. 31, 1982—G
Q
Apr. 30, 1982—R
May 15, 1982—A
E
K
May 31, 1982—S
June 30, 1982—H
T
July 31, 1982—U
Aug. 15, 1982—B
M
Aug. 31, 1982—V
Sept. 30, 1982—J
W
Oct. 31, 1982—X
Nov. 15, 1982—C
Nov. 30, 1982—Y "'.'.'.'.'.'.'.'..




130,954 121,328 117,458
29,126 28,279 26,841
37,417 30,187 37,230
36,025 34,505 27,864
11,752 13,354 12,774
16,634 15,002 12,748
49,359
59,978

43,688
58,718

490
64
591
247
640
525
1,447
53
1,041
411
119
714
1,073
1,162
1,074
570
78
550
455
770
239
380

461
374
1,101
426
226
733
261
191
1,071
411
80
332
351
364
1,364
571
181
408
596
1,600
119
649
177
577
462
59
545
245
632
496
1,447
53
1,019
359
119
705
1,000
1,162
1,074
570
76
550
420
770
239
364

V/2
61/2
75/8
IVi

VA
6%
8
75/8

8V2
9
63/4
83/8

6%
85/8

8%
91/4

5%

97s
934
7
73/a
934
67s
95/8
934
73/8
71/2
93/4
634
93/8
75/8

8%
95/8

6?4
101/8
125/8

7%
7
121/8
7V4
113/8
111/2
61/8
137/8

7%
15
113/8

8
7
91/4

9%
8*4
85/8

8%
8VB

9
llH
83/8
11%
Y1V%
7%
7V»
13%

45,244
56,494
403
1,512
399
809
457
5,273
177
322
859
714
2,435
688
461
153
725
354
700
307
33
538
383
351
1,074
397
218
698
159
185
1,041
313
80
306
311
343
1,301
563
131
405
527
1,600
116
594
167
571
0
59
0
245
0
0
1,447
53
1,018
0
115
0
0
1,162
1,068
0
64
0
0
770
227
0

9,626
847
7,230
1,520
-1,602
1,632

3,870
1,438
-7,043
6,641
580
2,254

5,671
1,260

-1,556
2,224
-403
-1,512
-399
—809
-457
-5,273
-177
-322
-859
—714
-2,435
-688
-461
-153
—725
-354
-700
-307
-33
-538
78
23
27
29
8
35
102
6
30
98
0
26
40
21
63
8
50
3
69
0
3
55
10
6
462
0
545
0
632
496
0
0
1
359
4
705
1,000
0
6
570
12
550
420
0
12
364

-461
-374
-1,101
—426
-226
—733
-261
-191
-1,071
-411
—80
—332
-351
-364
-1,364
-571
-181
-408
-596
-1,600
-119
-649
—177
-577
28
46
2
8
29
0
0
22
52
0
9
73
0
0
0
2
0
35
0
0
16

Tables 219

U.S. government securities—Cont.
Treasury notes—Cont
Dec. 31, 1982—L
Z
Jan. 31, 1983—M
Feb. 15, 1983—A
Feb. 28, 1983—N
Mar. 31, 1983—D
P
Apr. 30, 1983—Q
May 15, 1983—C
G
May 31, 1983—R
June 30, 1983—E
S
July 31, 1983—T
Aug. 15, 1983—K
J
Aug. 31, 1983—U
Sept. 30, 1983—F

V
Oct. 31, 1983—W
Nov. 15, 1983—B
L
Nov. 30, 1983—X
Dec. 31, 1983—H
Y
Feb. 15, 1984—A
Mar. 31, 1984—D
May 15, 1984—C
G
K
June 30, 1984—E
Aug. 15, 1984—B
Sept. 30, 1984—¥".'.'.'.'.'.'.'.'.'.'.
Nov. 15, 1984—L

M

Dec.
Feb.
Mar.
May

31, 1984—H
15, 1985—A
31, 1985—G
15, 1985—C
D
June 30, 1985—H
Aug. 15, 1985—B

Sept. 30, 1985—J'.'.'.'.'.'.'.'..'.'..
*
'
Nov. 15, 1985—F
Dec. 31, 1985—K
Feb. 15, 1986—C
May 15, 1986—A
D
Aug. 15, 1986—B
Nov. 15, 1986—E
F
Feb. 15, 1987—B
May 15, 1987—C
Nov. 15, 1987—A
Jan. 15, 1988—C
Apr. 15, 1988—D
May 15, 1988—A
July 15, 1988—E
Oct. 15, 1988—F
Nov. 15, 1988—B
May 15, 1989—A
Nov. 15, 1989—B
Aug. 15, 1990—A
Nov. 15, 1990—B
May 15, 1991—A
Aug. 15, 1991—B
Nov. 15, 1991—C
Treasury bonds—Total
,
1975-85—May
1978-83—June




93/s

15H
135/8

8
13%
9V4
125/8
141/2

7%
11%
155/8
8%
145/8

15%
9V4
11%
16V4
93/4
16
15¥t
7
9%
121/8
IO1/2

13
71/4
14Y4
91/4

13^
15%
8%
VA
13i/4
121/8

16
14%
14
8

459
428
542

459
350
0

459

2,144

2,144

2,138

489
12
888
313
113
861
475
361

0
12
0
0
113
851
0
426
0
0

3,189
1,081

3,189
1,079

640
284
441
606
101

0
284
0
0
101

0
0

669
221
600

0
221
0

0
9
0
0
95
837
0
408
0
0
0
0
0
284
0
0
101
0
0
156
0

3,913

3,913

3,913

533
69
505
751
505
385
810
339
1,189
1,053

531
69
500
0
505
385
0
339
0
0

0
69
0
0
0
385
0
0
0
0

309

252

0

505
426

1,991

1,935

1,448

1,448

1,448

14
8*4

378
38
261
250

0
38
260
0

0
38
0
0

1,624

1,624

1,624

95/8
15%
113/4
141/8
131/2

79
288
5
154
17

79
0
0
0
0

0
0
0
0
0

133/8

103/8
143/8

7%
1334
8
13%
16Vs
9
12
75/8
123/8
13V4
81/4

14
153/8
834

1,158

1,158

1,137

0
78
542
0
489
0
888
313
0
10
505
0
475
361
0
2
640
0
441
606
0
56
669
0
600
0
2
0
5

751
0
0
810
0

0
350
0
6
0
3
0
0
18
14
0
18
0
0

3,189
1,079

0
0
0
0
0
1,935

0

65
0
0
531
0
500
0

1,189
1,053

505
0
0
339
0
0

57

252

0
378
0
1
250
0
0
288
5
154
17
0
22
0
22
29
0
0
0
5
117
0
18
121
0
0
0
0

0
0
0
260
0
0
79
0
0
0
0
21
0
0
0
0
2
498
0
0
0
3
0
0

22

0

0

1,987

1,987

1,987

22
29

0
0

0
0

1,659

1,657

1,659

498
616
5
117

498
616
0
0

0
616
0
0

1,754

1,754

1,751

18
121

0
0

0
0

1,139

1,139

1,130

324
444
400

220
0
0
0

9
8

WA

459

459

1034
1034
13
14Vi
14%
141,4

1,942
1,186

1,942
1,186

644
324
444
400

220
0
0
0

451
422
0
0
0
0
0

18,401

16,893

14,553

1,508

2,340

156
87

156
87

156
87

0
0

0
0

4*4
3V4

424

1,520
1,186

220

Tables

3. Federal Reserve Bank Holdings of U.S. Government and
Federal Agency Securities, December 31, 1979-81—Continued
Millions of dollars

U.S. government securities—Cont.
Treasury bonds—Total—Cont.
1980—Feb
Nov
1981—Aug
1982—Feb
1984—Aug
1985—May
1986—Nov
1987-92—Aug
1988-93—Feb
Aug
1989-94—May
1990—Feb
May
1992—Aug
1993—Feb
Aug. . .
Nov. . .
1993-98—May
1994-99—May
1994—Feb. . .
Aug. ..
Nov. ..
1995—Feb. . . .
May
Nov
1995-2000—Feb.
Aug.
1996-2001—Aug.
2001—May
Aug
Nov
1998—Nov
2000-05—May . . .
2002-07—Feb. . . .
Nov. ..
2003-08—Aug. ..
Nov. ..
2004-09—May ..
Nov. ..
2005-10—Feb. ..
May ..
Nov. ..
2006-11—May . . .
Nov. . .
Held under RPs

4
63/8
63/8
3YA

6Ya

4i/4
4
71/2

4Vs
31/2
8V4

VA
6V4,

VA
8y

8V2
9
8?4
lOVs
IO1/2
103/8
125/8
11V4
7%
83/ 8

8
13i/8
13%
1534
31/2
8V4
75/8

7%

9VB

10%
1134
10
1234
13%
14

Federal agency obligations
Held outright—Total
Banks for Cooperatives
Export-Import Bank
Federal Farm Credit Banks
Federal Home Loan Banks
Federal Home Loan Mortgage
Corporation
Federal Intermediate Credit Banks
Federal Land Banks
Farmers Home Administration . . .
Federal National Mortgage
Association
Government National Mortgage
Association—PCs
U.S. Postal Service
Washington Metropolitan Area
Transit Authority
General Services Administration ..
Held under RPs
1. Excludes securities sold under matched agreements, and securities held under repurchase
agreements.




0
0
— 124
0
0
0
0
0
0
0
0
0
0
0
0
0
1
0
0
0
13
10
15
0
0
5
46
32
0
1
0
16
44
55
0
0
0
0
0
0
0
0
10
0
367
680
337
1,187

-266
-74
1
0
0
0
0
0
0
0
0
0
0
0
0
0
13
15
0
0
24
10
34
0
28
7
282
0
19
11
1
0
0
0
0
0
0
0
2
0
0
494
512
1,070
159
0
0
861

2,271

386
— 14
0
501
74

523
0
0
508
155

0
97
1,163
196

5
-16
—148
—24

0
-22
-175
-9

0
0
0
386
355
47
310
509
24
384
77
84
342
92
70
136
132
159
157

0
0
124
386
355
47
310
509
24
384
77
84
342
92
70
136
131
159
157

266
74
123
386
355
47
310
509
24
384
77
84
342
92
70
136
118
144
157

1,004

1,004

1,004

97
52
49
2
28
12
328
32
585

84
42
34
2
28
7
282
0
585

60
32
0
0
0
0
0
566

2,054

2,053

2,042

489
16
44
55
31

489
0
0
0
31

488
0
0
0
31

1,493
1,389

1,493
1,389

1,493
1,389

265
749

265
749

265
747

1,534

31/2

1,534

1,534

633
820
522

633
820
512

1,070

1,070

526
680
337

159
0
0

633
326
0
0
0
0
0

3,216

2,029

1,168

9,125

8,739

8,216

21
16

35
16

1,960
2,500

1,459
2,426

35
16
951

5
59
840
163

0
75
988
187

3,312

3,305

3,237

83
37

83
37

83
37

0
0

0
0

117
14
269

117
14
525

117
14
494

0
0
-256

0
0
31

2

68

NOTE. Details may not add to totals because of
rounding.

Tables

221

B m k I - , di?,a<" o f S o c i a l S h u u - l e n n T r t
. . « . . ! • > ' ,-Uv
' ' i v I ' n UJ1 S L I ^ 1<>"
Millions of dollars

Date "]"
1972
Sept. 12
1973
Aug. 15
Sept. 7
81
9
10
11
12
14

Amount
38
351
73
73
73
42
485
169
319

Amount

Date
1973
Sept. 15
16 1
1974
Nov.

319
319

6

131

1975
Mar. 11
12
13
14

626
1,043
315
820

1. 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 percent below the




Date
1975
Mar. 15

Amount

17

820
820
832

5
6
7
11
12
13
15

656
965
474
204
543
399
481

16i

Aug.

Date

Amount

1977
Sept. 30
Oct.
1
2i
3i

1979
Mar. 31
Apr.

li

2
3

2,500
2,500
2,500
2,500
2,600
2,600
1,283
376

prevailing discount rate of the Federal Reserve
Bank of New York. For data for earlier years,
beginning with 1942, see previous ANNUAL REPORTS. No holdings after 1979 nor on other dates
not shown.

222

Tables

5
Jan.

Feb.

Mar.

Apr.

1,100
3,865
0
1,000

0
357
0
0

1,607
0
0
0

1,141
0
0
0

0
0
462
0
0

0
23
990
-1,936
0

0
0
878
-1,385
0

115
0
522
-261
0

1 to 5 years
Gross purchases
Gross sales
Maturity shift
Exchange

0
0
-462
0

0
0
-990
1,211

0
0
-878
1,385

469
0
-522
261

5 to 10 years
Gross purchases
Gross sales
Maturity shift
Exchange

oooo

0
0
0
400

oooo

164
0
0
0

Over 10 years
Gross purchases
Gross sales
Maturity shift
Exchange

oooo

0
0
0
325

oooo

Millions of dollars

89
0
0
0

All maturities
Gross purchases
Gross sales
Redemptions

1,100
3,865
1,000

0
380
0

1,607
0
0

1,977
0
0

61,427
63,062

30,819
31,651

32,003
30,441

37,251
37,295

6,108
8,137

0
0

1,623
1,246

9,458
9,835

-4,159

452

422

1,644

Type of transaction
U.S. GOVERNMENT SECURITIES

Outright transactions (excluding matched transactions)
Treasury bills
Gross purchases
Gross sales
Exchange
Redemptions
Others within 1 year
Gross purchases
Gross sales
Maturity shift
Exchange
Redemptions

Matched transactions
Gross sales
Gross purchases
Repurchase agreements
Gross purchases
Gross sales
Net change in U.S. government securities
FEDERAL AGENCY OBLIGATIONS

Outright transactions
Gross purchases
Gross sales
Redemptions
Repurchase agreements
Gross purchases
Gross sales

0
0
15
1,211
1,268

42

-58

0
0

0
298

0
-298

-776

0

298

-298

5,460

Net change in federal agency obligations

494
437

450

762

1,287

652
1,177
-525

-3

BANKERS ACCEPTANCES

Outright transactions, net

0
-776

Repurchase agreements, net
Net change in bankers acceptances
Total net change in System Open Market Account




Tables

I

June I

Aug.

j

Sept.

|

Oct.

|

Nov.

P

Dec.

|"

Total

oooo

May

223

295
90
0
0

1,325
0
0
100

1,713
333
0
0

1,753
945
0
500

241
1,157
0
200

1,765
0
0
16

2,170
0
0
0

13,899
6,746
0
1,816

0
0
2,900
-1,281
0

0
0
833
-823
0

122
0
1,073
-351
0

0
0
2,807
-2,430
0

0
0
628
-599
0

0
0
425
0
0

0
0
1,389
-3,047
0

80
0
887
-754
0

317
23
13,794
-12,869
0

0
0
-1,724
681

0
0
-833
823

607
0
-1,073
351

0
0
-820
1,724

0
0
-628
599

0
0
-425
0

100
0
-1,057
2,325

526
0
-887
754

1,702
0
-10,299
10,117

0
0
-1,176
300

0
0
0
0

64
0
0
0

0
0
-1,987
400

0
0
0
0

0
0
0
0

0
0
-332
400

165
0
0
0

393
0
-3,495
1,500

0
0
0
300

0
0
0
0

182
0
0
0

0
0
0
305

0
0
0
0

0
0
0
0

0
0
0
322

108
0
0
0

379
0
0
1,253

790
0
0

295
90
0

2,301
0
100

1,713
333
0

1,753
945
500

241
1,157
200

1,865
0
16

3,049
0
0

16,690
6,769
1,816

45,658
43,492

51,106
52,607

69,972
69,309

54,329
55,917

52,055
51,555

58,581
58,372

42,012
41,900

54,098
54,044

589,312
589,647

1,219
1,219

3,509
3,509

23,217
21,599

7,199
8,817

0
0

3,902
3,902

9,505
7,709

14,180
12,760

79,920
78,733

-1,376

1,706

3,155

1,350

-192

-1,325

3,534

4,415

9,626

OO*

0
0
26

OO*

OO*

0
0
33

0
0
15

494
0
10

4

0
0

494
0
108

186
186

691
691

5,182
4,822

864
1,225

0
0

787
787

1,607
1,288

1,647
1,697

13,320

-26

360

-360

-33

-15

802

-54

130

0
0

0
0

0
453

0
-453

0
0

0
0

0
744

0
-549

0
-582

0

0

453

-453

0

0

744

-549

-582

-1,376

1,680

3,968

536

-225

-1,340

5,080

3,812

9,175

* Less than $500,000.

 redemptions, and
NOTE. Sales,
reduce holdings of
http://fraser.stlouisfed.org/ the System
Federal Reserve Bank of St. Louis

negative figures
Open Market

13,576

Account; all other figures increase such holdings.
Details may not add to totals because of rounding.

224

Tables

6. Income and Expenses of Federal Reserve Banks, 1981
Dollars
Item

Total

Boston

New York

Philadelphia

Cleveland

CURRENT INCOME
Loans
Acceptances
U.S. government
securities
Foreign currencies
Priced services
All other
Total
CURRENT EXPENSES

196,331,509
18,712,312

9,362,575

45,353,928
18,712,312

11,439,935

15,236,123

14,551,098,804
577,370,665
154,103,355
10,733,008

628,660,113
15,702,157
9,423,912
401,769

4,167,757,056
158,993,196
24,102,288
4,575,228

549,249,289
21,313,703
5,626,703
213,369

1,062,401,528
44,290,531
9,836,160
638,632

15,508,349,653

663,550,526

4,419,494,008

587,842,999

1,132,402,974

432,015,516

27,804,277

93,748,943

21,383,725

25,965,099

114,682,239
9,321,086
13,824,536

7,640,992
348,694
709,876

23,624,777
3,428,729
1,911,345

6,139,862
379,826
456,343

7,364,623
378,963
970,377

99,837,683
17,066,723

5,348,375
1,063,781

13,249,112
3,804,729

4,183,558
817,121

7,206,175
960,961

Salaries and other personnel expenses . . . .
Retirement and other
benefits
Fees
Travel
Postage and other
shipping costs
Communications
Materials and
supplies
Building expenses
Taxes on real estate . .
Property depreciation1
Utilities
Rent
Other
Equipment
Rentals
Depreciation
Repairs and
maintenance3 . . .
Cost of Federal
Reserve currency . .
All other
Recoveries
Expenses capitalized3 . .
Total 4
Reimbursements
Net expenses . . . .




37,178,034

2,329,943

7,157,958

1,888,866

2,152,532

16,016,014
12,163,592
18,801,492
10,921,262
9,574,540

2,945,563
1,913,411
2,151,978
456,529
530,219

2,797,787
592,446
3,862,640
6,476,699
1,863,871

1,340,142
1,481,039
1,946,101
25,054
837,748

884,462
822,134
1,127,192
171,060
436,312

46,000,529
24,136,555

1,779,381
1,756,650

7,580,261
4,995,667

1,339,269
1,667,484

3,873,504
1,436,909

15,913,291

805,215

3,762,612

868,579

660,034

82,924,013
19,183,158
-4,604,352
-2,475,768

5,065,377
1,751,536
-304,306
-124,601

15,979,925
2,941,228
-975,512

3,968,334
842,991
-429,333

5,058,443
1,471,781
-37,183
-154,260

969,042,481
-71,928,076

63,972,890
-7,038,434

196,803,217
-18,152,139

49,136,709
-3,997,364

60,749,118
-5,597,428

897,114,405

56,934,456

178,651,077

45,139,345

55,151,690

Tables

225

6.—Continued
Richmond

Chicago

Atlanta

St. Louis

Minneapolis

Kansas City

Dallas

San Francisco

20,183,192

6,872,846

30,154,475

7,884,168

7,466,473

18,732,638

8,847,852

14,797,304

1,164,394,436
28,620,552
10,532,966
855,115

478,113,008
42,076,420
18,277,346
702,256

2,226,833,457
82,499,886
23,794,221
1,153,198

549,026,607
16,834,636
8,071,572
301,897

228,392,614
17,956,945
9,096,704
346,931

666,257,777
24,129,645
11,632,636
202,576

891,720,713
34,586,775
10,860,788
509,962

1,938,292,206
90,366,219
12,848,059
832,075

1,224,586,261

546,041,876

2,364,435,237

582,118,880

263,259,667

720,955,272

946,526,090

2,057,135,863

32,429,806

36,853,183

55,495,501

22,522,717

18,849,950

27,664,892

25,631,576

43,665,847

8,981,798
362,138
1,217,586

10,095,130
579,196
1,327,223

15,055,819
792,431
1,941,338

5,988,004
597,147
625,441

4,612,185
435,042
810,063

7,359,311
429,070
1,168,549

6,059,583
543,714
955,118

11,760,155
1,046,136
1,731,277

10,780,904
1,213,187

9,680,821
1,759,650

13,795,706
2,112,829

6,515,474
668,250

4,473,450
845,641

7,094,432
1,045,456

6,768,812
1,073,751

10,740,864
1,701,367

3,471,559

3,732,057

4,851,945

2,173,596

1,274,685

2,707,171

2,467,399

2,970,323

1,249,670
2,725,290
1,433,043
996,785
951,206

989,263
863,843
1,671,607
127,482
986,473

2,143,327
559,792
1,870,429
1,193,903
1,678,012

392,203
461,312
957,745
260,810
367,551

1,702,380
852,286
639,320
71,170
501,001

461,808
718,764
995,459
35,924
452,558

505,581
474,082
1,061,378
156,555
624,940

603,828
699,193
1,084,600
949,291
344,649

5,583,045
1,746,231

5,309,408
1,626,484

6,646,711
1,954,681

2,843,586
996,302

1,846,902
1,030,148

2,142,872
2,378,566

2,891,651
1,785,408

4,163,939
2,762,025

1,304,854

1,378,331

1,426,608

886,180

572,998

1,233,240

1,331,266

1,683,374

9,974,194
1,210,098
-837,926
-180,485

6,198,267
1,617,817
-451,523
-287,487

10,251,878
2,168,148
-649,494
-596,633

3,069,797
656,843
-436,911
-62,902

1,211,177
1,056,460
-90,564
-68,712

4,879,439
1,096,936
-269,357
-660,106

5,904,801
1,764,466
-86,352
-176,859

11,362,381
2,604,854
-35,891
-163,723

81,175,3214
-5,162,709

84,057,225
-5,161,016

122,692,931
-8,098,344

49,483,145
-3,217,310

40,625,582
-2,021,586

60,934,984
-3,489,821

59,736,870
-2,768,745

99,674,489
-7,223,180

76,012,612

78,896,210

114,594,587

46,265,835

38,603,996

57,445,163

56,968,125

92,451,309

For notes see end of table.




226

Tables

6. Income and Expenses of Federal Reserve Banks, 1981—Continued
Dollars
Total

Item

Boston

New York

Philadelphia

|

Cleveland

PROFIT AND LOSS

Total deductions
Net deductions from
current net income
Earnings credits applied
in payment of
priced services . . . .
Assessment for expenditures of Board of
Governors6
Net earnings before
payments to
U.S. Treasury
Dividends paid
Payments to
U.S. Treasury

14,611,235,248

606,616,070

4,240,842,931

542,703,654

1,077,251,284

82,580,165

439,424

76,354,576

458,270

450,961

124,008,397

5,457,018

34,318,309

4,874,159

9,171,623

305,991,850
21,452,907

8,567,772
922,676

78,027,922
15,598,419

11,627,690
142,963

24,173,356
186,189

451,453,154

14,947,466

127,944,650

16,644,812

33,531,168

368,872,989

14,508,042

51,590,074

16,186,542

33,080,207

4,006,196

577,927

130,755

174,136

137,957

63,162,700

1,728,700

16,066,500

2,402,000

4,970,500

14,175,193,363

589,801,401

4,173,055,602

523,940,976

1,039,062,620

74,573,806

Current net income . . . .
Additions to current
net income
Deductions from current
net income
Losses on sales of
U.S. government
securities
Losses on foreign
currency
transactions5
All other

2,001,083

18,797,197

2,798,463

5,756,998

....

14,023,722,907

587,480,068

4,141,581,905

514,110,063

1,032,044,272

Transferred to surplus
Surplus, January 1

76,896,650
1,202,232,200

320,250
33,114,250

12,676,500
306,006,800

7,032,450
45,954,150

1,261,350
95,189,950

Surplus, December 31

1,279,128,850

33,434,500

318,683,300

52,986,600

96,451,300

Reserve notes)




Tables

Richmond

|

Atlanta

|

Chicago

|

St. Louis

Minneapolis j Kansas City

227

Dallas

San Francisco

1,148,573,648

467,145,665

2,249,840,650

535,853,045

224,655,673

663,510,109

889,557,965

1,964,684,554

453,086

456,602

396,067

485,484

467,120

461,357

711,194

1,446,024

10,031,986

4,195,583

19,186,911

4,774,349

2,020,949

5,736,024

7,574,644

16,666,842

15,605,584
143,719

22,949,389
203,991

44,980,802
2,049,918

9,179,755
34,034

9,791,739
233,850

13,157,650
304,090

18,665,503
228,956

49,264,688
1,404,102

25,781,289

27,348,963

66,217,631

13,988,138

12,046,538

19,197,764

26,469,103

67,335,632

25,328,203

26,892,361

65,821,564

13,502,654

11,579,418

18,736,407

25,757,909

65,889,608

415,413

511,247

1,565,810

4,359

206,213

31,360

199,807

51,212

3,236,800

4,735,700

9,246,000

1,876,900

2,091,100

2,731,200

3,900,200

10,177,100

1,119,593,232

435,006,357

2,173,207,276

520,469,132

210,778,942

642,011,142

859,700,049

1,888,566,634

3,841,323

5,637,026

10,748,301

2,211,992

2,736,631

3,280,922

4,745,886

12,017,984

1,111,570,209

422,218,381

2,159,222,575

516,514,190

199,273,611

633,479,120

844,715,263

1,861,513,250

4,181,700
61,685,200

7,150,950
90,077,950

3,236,400
176,818,700

1,742,950
35,725,850

8,768,700
38,074,150

5,251,100
51,793,450

10,238,900
73,527,600

15,035,400
194,264,150

65,866,900

97,228,900

180,055,100

37,468,800

46,842,850

57,044,550

83,766,500

209,299,550

1. This item includes depreciation of furniture,
furnishings and fixtures, which was reported under
equipment in earlier years.
2. Reported under "All other" in earlier years.
3. This item includes expenses for labor and
materials temporarily capitalized and charged to
activities when the products are consumed.
4. The total expense for Richmond has been
adjusted to exclude $3,437,662, which was allocated to the expenses of other Federal Reserve




Banks for operation of the Federal Reserve
Communications System.
5. This item includes unrealized gains and
losses.
6. For additional details, see the last three
pages of the section "Board of Governors,
Financial Statements."
NOTE. Details may not add to totals because
of rounding.

228

Tables

7. Income and Expenses of Federal Reserve Banks, 1914-81
Dollars

Period, or Federal
Reserve Bank
All Banks
1914-15

Current
income

Current
expenses

Net additions
or
deductions (—)

Assessments of
expenditures of
Board of
Governors

1916
1917
1918
1919

..
..
..
..

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

1920
1921
1922
1923
1924
1925
1926
1927
1928
1929

..
..
..
..
..
..
..
..
..
..

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

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
— 12,307,074
—4,430,008
— 1,736,758
485,817
-1,631,274
2,232,134
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

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
-625,991
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

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

1960
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




Tables

229

Payments to U.S. Treasury
Dividends
paid

Franchise
tax

Under
section 13b

Interest on
Federal Reserve
notes

Transferred
to surplus
(section 13b)

Transferred
to surplus
(section 7)

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

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
15,993,068
-659,904
2,545,513
-3,077,962
2,473,808
8,464,426
5,044,119
21,078,899
22,535,597

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

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

1,134,234

2,011,418

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

297,667
227,448
176,625
119,524
24,579

-60,323
27,695
102,880
67,304
-419,140
-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

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

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




230

Tables

7. IlKV
Dollars

deductions ( —)

Assessments for
expenditures of
Board of
Governors

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
693,559,531

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
-151,148,220

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
50,529,700

12,802,319,335
15,508,349,653

791,157,259
897,114,405

-115,385,855
-372,879,185

62,230,800
63,162,700

115,099,962,524

10,917,086,333

-1,675,835,814

714,539,108

5,484,923,330
29,948,069,669
5,818,205,528
9,036,425,391
8,695,923,527
5,467,815,927
18,158,041,653
4,489,106,874
2,421,737,542
4,826,042,463
5 667,689,409
15,085,981,211

741,189,709
2,292,913,784
589,170,804
787,168,679
870,760,030
876,934,783
1,443,480,078
607,061,195
433,175,865
659,576,024
570,854,415
1,044,800,967

-65,222,551
-384,585,340
-71,547,957
-144,779,012
-103,873,530
-113,506,835
-276,598,504
-62,100,081
-44,009,404
-72,349,388
-100,158,697
-237,104,516

29,487,286
189,626,986
36,264,218
62,446,490
37,120,076
48,218,860
105,705,872
23,613,072
19,169,015
29,662,709
39,141,573
94,082,951

115,099,962,524

10,917,086,333

-1,675,835,814

714,539,108

Period, or Federal
Reserve Bank

Current
income

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
Total 1914-81 . . . .

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
10,310,148,406

Aggregate for each
Bank, 1914-81
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total




Current
expenses

Net additions

232

Tables

8. Bank Premises of Federal Reserve Banks and Branches, December 31, 1981
Dollars
Federal
Reserve
Bank
or Branch
Boston
Annex
New York
Annex
Buffalo

Cost
Land

Buildings Building ma(including chinery and
vaults) 1
equipment

Total 2

Net
book
value

21,635,436
27,840

...
,

79,159,148
89,202

5,425,128
44,538

106,219,711
161,580

98,081,987
142,846

3,436,277
477,863
887,844

21,877,777
1,136,219
2,812,991

13,202,880
745,855
1,660,438

38,516,934
2,359,936
5,361,274

Other
real
estate 3

19,280,083
665,489
2,796,691

Philadelphia .

1,876,601

51,803,403

5,030,660

58,710,664

51,583,442

Cleveland
Cincinnati
Pittsburgh

1,074,281
1,997,249
1,658,376

6,471,564
13,537,723
6,387,134

4,431,169
7,521,727
3,585,701

11,977,014
23,056,699
11,631,211

3,766,400
16,024,116
6,804,960

Richmond
Annex
Baltimore
Charlotte

3,912,575
522,733
4,618,738
347,071

55,625,519
3,725,466
21,852,556
1,085,276

14,314,313
3,616,991
1,203,478
901,967

73,852,406
7,865,190
27,674,773
2,334,314

67,850,734
4,609,143
25,382,048
1,233,514

Atlanta
Birmingham .
Jacksonville .
Annex
Miami
Nashville
New Orleans

1,202,255
2,358,632
164,004
107,925
3,547,571
592,342
3,080,344

5,954,751
1,905,770
1,706,794
76,236
11,770,782
1,558,205
2,754,272

3,558,580
1,027,604
778,505
15,843
2,101,877
1,175,891
1,476,257

10,715,586
5,292,006
2,649,303
200,003
17,420,230
3,326,439
7,310,873

5,783,299
3,634,906
911,212
157,351
16,918,424
1,573,111
5.105.788

Chicago
Annex
Detroit

4,511,942
53,066
797,734

16,244,443
302,249
3,048,942

11,420,610
93,916
1,972,024

32,176,996
449,230
5,818,700

14,472,399
377,767
2,628,101

700,378
1,051,214
700,075
1,135,623

4,123,015
2,318,793
2,859,819
4,230,254

3,823,399
1,023,475
1,165,909
2,126,755

8,646,792
4,393,482
4,725,803
7,492,632

3,050,843
3,143,522
2,540,157
5,622,497

1,394,384
224,090

26,932,538
202,278

7,692,189
61,906

36,019,112
488,274

27,267,138
347,340

Kansas City .
Denver
Oklahoma City
Omaha

1,338,737
2,997,746
646,386
1,030,226

11,681,270
3,235,572
2,382,828
1,771,628

5,425,542
2,362,438
1,702,342
817,215

18,445,548
8,595,755
4,731,556
3,619,068

11,027,073
5,655,006
3,549,129
2,102,380

Dallas
El Paso
Houston
San Antonio

,

3,729,268
262,477
2,049,064
448,596

4,945,955
1,204,450
1,688,720
1,400,390

3,653,592
393,301
775,069
570,846

12,328,814
1,860,228
4,512,853
2,419,833

7,327,888
1,467,379
3,683,679
1,773,337

San Francisco
Annex
Los Angeles .
Portland
Salt Lake City
Seattle
,

12,436,775
247,201
644,238
207,381
480,222
274,772

49,021,381
131,114
4,760,685
1,680,096
1,995,026
1,999,800

2,174,233
62,078
2,406,800
649,432
916,067

63,632,389
440,393
7,811,722
2,536,908
3,391,315
3,509,452

59,026,013
345,605
4,306,905
1,970,092
2.221.789
1,969,544

4,781,849

Total

90,887,550

439,452,034

124,343,417

654,683,001 498,181,127

12,188,562

St. Louis
Little Rock
Louisville
Memphis

...

Minneapolis
Helena

..
,

.

1. Includes expenditures for construction at
some offices pending allocation to appropriate
accounts.
2. Excludes charge-offs of $17,698,968 before
1952.




1,234,879

1,224,363

1,675,944

951,793

283,753

935,551
2,335,310

3. Includes acquisitions for banking-house purposes, and Bank premises formerly occupied and
being held pending sale.
NOTE. Details may not add to totals due to

rounding.

Tables

233

in I*, mvjipal Departments of
k nks.
Operation

1981

1980

1979

Millions of pieces

1978

1

(2)

(2)

(2)

(2)

10,277
3,510
17,023

9,432
3,197
17,700

8,839
2,969
18,756

8,537
2,621
18,654'

683
126
15,827

705
117
15,716

718
117
15,067

721
125
14,107

188
54
2,625

Loans
.
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled
U.S. government checks
Postal money orders
All other
Issues, redemptions, and exchanges of
U.S. government securities
Transfers of funds
Food stamps redeemed

301
43
2,541

335
35
1,730

281
29
1,906

Amounts (millions of dollars)
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled
U.S. government checks
Postal money orders
All other
Issues, redemptions, and exchanges of
U.S. government securities
Transfers of funds
Food stamps redeemed

236,532
117,901
24,912
3,184

220,628
93,119
22,638
2,765

138,928
81,175
16,443
2,495

611,403
6,030
7,739,086

598,569
6,164
8,050,724r

511,044
6,323
8,514,670

439,907
5,534
7,111,254

12,728,458
93,968,246
9,547

10,326,013r
78,594,862
9,268

8,186,706r
64,231,109
7,779

8,036,749
50,482,656
7,251

1. Packaged items handled as a single item are
counted as one piece.




267,957
104,333
20,183
2,703

2. Number handled (in thousands): 1981, 36;
1980, 25; 1979, 38; 1978, 31.
r Revised.

Tables

233

Departments of
Operation

1981

1980

1979

1978

Millions of pieces 1
Loans
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled
U.S. government checks
Postal money orders
All other
Issues, redemptions, and exchanges of
U.S. government securities
Transfers of funds
Food stamps redeemed

()
10,277
3,510
17,023

()
9,432
3,197
17,700

()
8,839
2,969
18,756

()
8,537
2,621
18,654'

683
126
15,827

705
117
15,716

718
117
15,067

721
125
14,107

188
54
2,625

301
43
2,541

335
35
1,730

281
29
1,906

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
Issues, redemptions, and exchanges of
U.S. government securities
Transfers of funds
Food stamps redeemed

236,532
117,901
24,912
3,184
611,403
6,030
7,739,086

598,569
6,164
8,050,724 '

12,728,458
93,968,246
9,547

10,326,013 r
78,594,862
9,268

1. Packaged items handled as a single item are
counted as one piece.




267,957
104,333
20,183
2,703

220,628
93,119
22,638
2,765

138,928
81,175
16,443
2,495

511,044
6,323
8,514,670

439,907
5,534
7,111,254

8,186,706 r
64,231,109
7,779

8,036,749
50,482,656
7,251

2. Number handled (in thousands): 1981, 36;
1980, 25; 1979, 38; 1978, 31.
r Revised.

234

Tables

10. Principal Operations of Federal Reserve Banks—Expense, Ratio of Expense for
Each Operation to Total Expenses, and Average Number of Employees, 1978-81
Expenses in thousands of dollars; number of employees in thousands; ratios in percent
Operation and item

1981 P

1980

1979

1978

348,991
36.01
6.4

322,912
37.3
6.5

279,094
36.6
6.3

259,983
36.4
6.3

Currency function
Expense
Ratio to total expenses
Average number of employees

213,083
21.99
1.7

193,123
22.3
1.8

180,974
23.7
1.9

187,864
26.3
2.0

Fiscal agency operations
Expense
Ratio to total expenses
Average number of employees

93,404
9.64
1.8

92,348
10.7
1.9

83,521
11.0
1.9

76,837
10.7
1.9

Bank supervision
Expense
Ratio to total expenses
Average number of employees

99.818
10.30
1.7

85,913
9.9
1.6

67,752
8.9
1.4

58,303
8.2
1.3

Other operations 2
Expense
Ratio to total expenses
Average number of employees

213,746
22.06
2.1

171,674
19.8
1.9

150,878
19.8
2.2

131,713
18.4
2.2

Check clearing operations *
•
Expense
Ratio to total expenses
Average number of employees

General administration and support
Average number of employees

s

10.2

9.9

9.4

9.8

969,042

865,970

762,219

714,700

71,928

74,812

68,786

62,084

897,114

Total expenses

791,157

693,433

652,616

Less reimbursements
Net expenses

1. Includes automated clearinghouse and noncash
collections.
2. Includes mainly economic research and statistics, foreign operations, and lending and credit.
3. General administration and support costs are
allocated to each operation.
p Preliminary.

NOTE. Comparability with earlier periods is
affected by the following accounting changes:
Before 1980, "Other operations" include the expense of monitoring reserve accounts and depository institution accounting, which are now
classified in "Bank supervision" and "General
administration and support" respectively. Also,
beginning 1981, the method of funding supplemental benefits for retirees was changed.

11. Number and Salaries of Officers and Employees of
Federal Reserve Banks, December 31, 1981
President
Federal Reserve
Bank (including
branches)

Employees

Other officers

Annual
salary Num(dollars) ber

Annual
salaries
(dollars)

Number
Full- Parttime
time

Total

Annual
salaries
(dollars)

Number

Annual
salaries
(dollars)

Boston
New York . . .
Philadelphia .
Cleveland . . .
Richmond . . .
Atlanta

100,000
130,000
72,000
94,000
87,000
95,000

51
137
41
44
68
69

2,306,700
7,223,000
1,822,150
1,846,000
2,862,500
2,932,265

1,328
4,075
1,066
1,317
1,911
2,125

200
95
91
69
98
18

25,676,728
82,591,531
19,030,842
22,156,550
28,889,044
32,668,944

1,580
4,308
1,199
1,431
2,078
2,213

28,083,428
89,944,531
20,924,992
24,096,550
31,838,544
35,696,209

Chicago
St. Louis
Minneapolis .
Kansas City .
Dallas
San Francisco

110,000
87,000
80,000
78,200
72,000
110,000

81
44
37
55
41
86

3,566,700
1,846,365
1,552,500
2,250,000
1,646,300
3,796,385

2,854
1,254
997
1,551
1,423
2,041

156
87
2
62
31
79

47,578,549
20,376,574
16,293,370
24,123,635
22,188,940
37,067,784

3,092
1,386
1,037
1,669
1,496
2,207

51,255,249
22,309,939
17,925,870
26,451,835
23,907,240
40,974,169

1415,200

754

33,650,865

21,942

988

378,642,491

23,696

413,408,556

Total




Tables

235

12. F u . , . . . _ . , . , .
Percent per annum
Loans to depository institutions

Extended credit2

Boston
New York
Philadelphia
Cleveland

Short-term
adjustment credit
and seasonal
credit 1

First 60 days
of borrowing

Next 90 days
of borrowing

After 150

12

Federal Reserve
Bank

12

13

14

I

I(

/

t

\f

\f

12

12

13

14

days

Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

1. Rates applied to short-term advances for the
purpose of meeting temporary funding requirements and to longer-term advances made to
smaller institutions for the purpose of meeting
seasonally recurring needs for funds. See sections
201.3(a) and 201.3(b)(l) of Regulation A.

\

2. Applicable to advances when exceptional circumstances or practices involve only a particular
depository institution and to advances when an
institution is under sustained liquidity pressures.
See section 201.3(b)(2) of Regulation A.

pository Institutions
Percent of deposits
Through July 13,1966
Net demand deposits9
Effective date 1
1917—June 21
1936—Aug. 16
1937—Mar. 1
May 1
1938—Apr. 16
1941—Nov. 1
1942_Aug. 20
Sept. 14
Oct. 3
1948—Feb. 27
June 11
Sept. 24, 16 . . . .
1949—May 5 , 1
June 30, July 1 .
Aug. 1
11, 16 . . . .
18
25
Sept. 1
1951—Jan. 11, 16
25, Feb. 1 .
1953—July 9, 1
1954—June 24, 16 . . . .
July 29, Aug. 1
1958—Feb. 27, Mar. 1
Mar. 20, Apr. 1
Apr. 17
24
1960—Sept. 1
Nov. 24
Dec. 1
1962—July 28
Oct. 25, Nov. 1

DigitizedFor notes see end of table.
for FRASER


Central reserve
city banks

Reserve city
banks

13

10
15
17Vi
20
17V4
20

191/2

22*A
26
223/4
26
24
22
20
22
24
26
24

23
22Yi
22
23
24
22
21
20
191/2
19
I81/2
18
I71/2

22
21
20
19V6
19
I8I/2
18
19
20
19
18
171/2
17

Country
banks
7
IOV2
12V4
14
12
14

6
5
6

16

71/2

5V4

15
14
13
12

7

13
14
13

6

12
II1/2
11

I61/2

12
16V6

Time deposits
(all classes
of banks)

6

'5"

236

Tables

13. Reserve Requirements of Depository Institutions—Continued
Percent of deposits
July 14, 1966, through Nov. 8, 1972 (deposit intervals in millions of dollars)
Net demand
deposits2
Reserve
city banks

Effective J date 1

Country
banks

Over 5

0-5

Time deposits*
(all classes of banks)

0-5

Other
time

Savings

Over 5

45

31/2

31/2
3

3
I61/2
17

12
12i/2

17
171/2

OverS

0-5
45

125

161/2 5

1966—July 14, 21
Sept 8 11
1967—Mar. 2
16
1968—Jan. 11, 18
1969—Apr. 17
1970—Oct. 1

5
6

12i/2
13

5

Nov 9, 1972 through Nov 12, 1980 (deposit intervals in millions of dollars)
.,
Net demand deposits2*6

Time and savings deposits*
Time ^

Effective date

1972—Nov. 9 . . . .
16
19
12
13 . . . .
30
8
30 . . . .

1973 July
1974 Dec
1975—Feb.
Oct
1976—Jan
Dec.

100400

Over
400

Savings

12

I61/28

171/2

35

IO1/2

0-2

12V2

131/2

10

12

13

18
171/2
I61/2

2-10

10

8

7V2

<
3ver 5, by
maturity

0-5, by
maturity

10100

13

180
days
to
4yrs.

30179
days

91/2

113/4

12?4

30179
days

180
days
to
4yrs.

3

6
3

4yrs.
or
more

55

35

3
7

4yrs.
or
more

21/28

1°

3
21/2 9

I9

161/4

Beginning Nov. 13, 1980
Type of deposit, and
deposit interval

Depository institution requirements
after implementation of 10
the
Monetary Control Act
Percent

Net transaction accounts
$0-$25 million
Over $25 million

|

Effective date

n

3
12

11/13/80
11/13/80

Nonpersonal time deposits12
By original maturity
Less than 4 years
4 years or more

3
0

11/13/80
11/13/80

Eurocurrency liabilities
All types

0

11/13/80

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 on aggregate
amounts of deposits, and reserve balances with the
Reserve Banks were increased in stages.
When two dates are shown, the first applies to
the change at central reserve or reserve city banks
and the second to the change at country banks.
2. Demand deposits subject to reserve requirements, beginning Aug. 23, 1935, were total demand
deposits minus cash items in process of collection
and demand balances due from domestic banks
(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 were allowed
to count vault cash as reserves, as follows: country




banks—in excess of 4 and 2V2 percent of net
demand deposits effective Dec. 1, 1959, and Aug.
25, 1960, respectively; central reserve city and
reserve city banks—in excess of 2 and 1 percent
effective Dec. 3, 1959, and Sept. 1, 1960, respectively. All institutions were allowed to count all
vault cash as reserves effective Nov. 24, 1960.
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,

Tables

237

ntinued

and were lowered in steps for (a) and (c) until
eliminated effective Mar. 4, 1974. Beginning June
21, 1973, loans aggregating $100,000 or less to any
U.S. resident were excluded from computations, as
were total loans of a bank to U.S. residents if not
exceeding $1 million. The applicable reserve percentage, which was originally 10 percent, was
increased to 20 percent on Jan. 7. 1971; reduced
to 8 percent on June 21, 1973, to 4 percent 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 1 percent, 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.

3. 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 order of withdrawal (NOW)
accounts were defined in the Board's Regulation Q
as savings deposits beginning Jan. 1, 1974. Effective with the reserve computation period beginning
Nov. 16, 1978, domestic deposits of Edge corporations were subject to the same reserve requirements
as deposits of member banks.
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 maintain
reserves related to the size of its net demand
deposits. The new reserve city designations were
as follows: A bank having net demand deposits
of more than $400 million was considered to have
the character of business of a reserve city bank,
and the presence of the head office of such a bank
constituted designation of that place as a reserve
city. Cities in which there were Federal Reserve
Banks or branches were also reserve cities. Any
bank, wherever located, having net demand deposits of $400 million or less was considered to
have the character of business of banks outside of
reserve cities and was permitted to maintain
reserves at ratios set for banks not in reserve
cities.
7. Beginning Nov. 2, 1978, a supplementary
reserve requirement of 2 percent was added to
the existing requirements for time deposits of
$100,000 or more and for certain other liabilities.
This supplementary requirement was eliminated
with the maintenance period beginning July 24,
1980.
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 percent during the entire period), requirements



were as follows: 8 percent for (a) and (b) from
June 21 through Oct. 3, 1973, and for (c) from
July 12 through Oct. 3, 1973; 11 percent from
Oct. 4 through Dec. 26, 1973; and 8 percent from
Dec. 27, 1973, through Sept. 18, 1974. Beginning
Sept. 19, the 8 percent 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.

Effective with the reserve maintenance period
beginning Oct. 25, 1979, a marginal reserve requirement of 8 percent was added to managed
liabilities in excess of a base amount. This marginal requirement was increased to 10 percent
beginning Apr. 3, 1980, was decreased to 5 percent
beginning June 12, 1980, and was reduced to zero
beginning July 24, 1980. Managed liabilities are
defined as large time deposits, Eurodollar borrowings, repurchase agreements against U.S. government and federal agency securities, federal funds
borrowings from nonmember institutions, and certain other obligations. In general, the base for the
marginal reserve requirement was originally the
greater of (a) $100 million or (b) the average
amount of the managed liabilities held by a member bank, Edge corporation, or family of U.S.
branches and agencies of a foreign bank for the
two statement weeks ending Sept. 26, 1979. For
the computation period beginning Mar. 20, 1980,
the base was lowered by (a) 7 percent or (b) the
decrease in an institution's U.S. office gross loans
to foreigners and gross balances due from foreign
offices of other institutions between the base
period (Sept. 13-26, 1979) and the week ending
Mar. 12, 1980, whichever was greater. For the
computation period beginning May 29, 1980, the
base was increased by IV2 percent above the base
used to calculate the marginal reserve in the
statement week of May 14-21, 1980. In addition,
beginning Mar. 19, 1980, the base was reduced to
the extent that foreign loans and balances declined.
8. The 16Vi percent requirement applied only
for one week and solely to former reserve city
banks. For other banks, the 13 percent requirement was continued in this deposit interval.
9. The average of reserves on savings and other
time deposits had to be at least 3 percent, the
legal minimum at that time.
10. For existing nonmember banks and thrift
institutions, there is a phase-in period ending
Sept. 3, 1987. For existing member banks the
phase-in period is about three years, depending
on whether their new reserve requirements are
greater or less than the old requirements. For
existing agencies and branches of foreign banks,
the phase-in ends Aug. 12, 1982. All new institutions will have a two-year phase-in beginning with
the date that they open for business.
11. Transaction accounts include all deposits on
which the account holder is permitted to make
withdrawals by negotiable or transferable instruments, payment orders of withdrawal, and telephone and preauthorized transfers (in excess of
three per month) for the purpose of making payments to third persons or others.
12. In general, nonpersonal time deposits are
time deposits, including savings deposits, that are
not transaction accounts and in which the beneficial interest is held by a depositor that is not a
natural person. Also included are certain transferable time deposits held by natural persons and
certain obligations issued to depository institution
offices located outside the United States. For
details, see section 204.2 of Regulation D.

238

Tables

14. Maximum Interest Rates Payable on Time and Savings Deposits at
Federally Insured Institutions ]

Percent per annum
Savings and loan associations and
mutual savings banks
(thrift institutions)

Commercial banks
Type and maturity
of deposit

Special variable ceiling
rates by maturity
6-month money
market time
deposits13
12-month all savers
certificates
2Vz years to 4 years . .
Accounts with no
ceiling rates
Individual retirement
accounts and
Keogh (H.R. 10)
plans (18 months
or more)

Previous
maximum

Percent Effective
date
Savings
Negotiable order of
withdrawal accounts3
Time accounts*
Fixed ceiling 5
rates by
maturity
14-89 days*
90 days to 18year
1 to 2 years
2 to 2Vi years8
2*i to 4 years8
4 to 6 years9
6 to 8 years9 9
8 years or more
Issued to governmental units
(all maturities)*1
Individual retirement
accounts and
Keogh (H.R. 10)
plans11 1 years or
(3
more) . **

In effect
Dec. 31, 1981

Percent Effective
date

7/1/79

5

7/1/73

51/2

7/1/79

51/4

12/31/80

5

1/1/74

5*4

12/31/80

5VA
5%
6
b
61/2
7*4
7V2
7%

8/1/79
1/1/80
7/1/73
l/i/li
7/1/73
11/1/73
12/23/74
6/1/78

5Y4
(io)
7V4
(?)

8

6/1/78

73/4

12/23/74

8

6/1/78

734

7/6/77

5
5*4

53/4

7/1/73
7/1/73
1/21/70
1/21/70
1/21/70
11/1/73

(7)
6

Percent Effective
date
51/4
5

(2)
1/1/74

<'
(2)
11/1/73
12/23/74
6/1/78

(73
)
5A
53/4
6
6
(io)
71/2
(?)

8

6/1/78

7?4

12/23/74

8

6/1/78

734

7/6/77

6//
612

6%
71/2
7%
8

1/1/80
(2)

(2)
1/21/70
1/21/70
1/21/70
11/1/73

(14)

(14)

(14)

(14)

(14)

(14)

(14)

(14)

(15)
(16)

(15)
(16)

(15)
(17)

(15)
(17)

(15)
(16)

(15)
(16)

(15)
(17)

(15)
(17)

(18)

(18)

(18)

(IS)

(18)

(18)

(18)

(18)

1. For the history of interest rate ceilings before
1981, see previous editions of the ANNUAL REPORT.
2. July 1, 1973, for mutual savings banks;
July 6, 1973, for savings and loan associations.
3. For authorized states only. Federally insured
commercial banks, savings and loan associations,
cooperative banks, and mutual savings banks in
Massachusetts and New Hampshire were first permitted to offer negotiable order of withdrawal
(NOW) accounts on Jan. 1, 1974. Authorization
to issue NOW accounts was extended to similar
institutions throughout New England on Feb. 27,
1976, in New York State on Nov. 10, 1978, and in
New Jersey on Dec. 28, 1979. Authorization to
issue NOW accounts was extended to similar
institutions nationwide effective Dec. 31, 1980.
4. For exceptions with respect to certain foreign
time deposits see the Bulletin for October 1962,
p. 1279; August 1965, p. 1084; and February 1968,
p. 167.
5. Effective Nov. 10, 1980, the minimum notice
period for public unit accounts at savings and
loan associations was decreased to 14 days, and
the minimum maturity period for time deposits at
savings and loan associations in excess of $100,000
was decreased to 14 days. Effective Oct. 30, 1980,




Percent Effective
date

5i/4

5V2

Previous
maximum

In effect
Dec. 31, 1981

the minimum maturity or notice period for time
deposits at mutual savings banks was decreased
from 30 to 14 days.
6. Effective Oct. 30, 1980, the minimum maturity
or notice period for time deposits at commercial
banks was decreased from 30 to 14 days.
7. No separate account category.
8. No minimum denomination. Until July 1,
1979, a minimum of $1,000 was required for savings and loan associations, except in areas where
mutual savings banks permitted lower minimum
denominations. This restriction was removed for
deposits maturing in less than 1 year, effective
Nov. 1, 1973.
9. No minimum denomination. Until July 1,
1979, the minimum denomination was $1,000 except for deposits representing funds contributed to
an individual retirement account (IRA) or a
Keogh (H.R. 10) plan established pursuant to
the Internal Revenue Code. The $1,000 minimum
requirement was removed for such accounts in
December 1975 and November 1976 respectively.
10. Between July 1, 1973, and Oct. 31, 1973,
certificates maturing in 4 years or more with minimum denominations of $1,000 had no ceiling; however, the amount of such certificates that an insti-

Tables

239

14.—Continued

tution could issue was limited to 5 percent of its
total time and savings deposits. Sales in excess
of that amount, as well as certificates of less than
$1,000, were limited to the 6V2 percent ceiling on
time deposits maturing in 2Vi years or more. Effective Nov. 1, 1973, ceilings were reimposed on
certificates maturing in 4 years or more with minimum denomination of $1,000. There is no limitation on the amount of these certificates that banks
can issue.
11. Accounts subject to fixed-rate ceilings. See
note 8 for minimum denomination requirements.
12. Effective Jan. 1, 1980, commercial banks are
permitted to pay the same rate as thrift institutions
on IRA and Keogh accounts and accounts of governmental units when such deposits are placed in
the new 21A-year or more variable-ceiling certificates or in 26-week money market certificates
regardless of the level of the Treasury bill rate.
13. Must have a maturity of exactly 26 weeks
and a minimum denomination of $10,000, and
must be nonnegotiable.
14. Commercial banks and thrift institutions
were authorized to offer money market time
deposits effective June 1, 1978. These deposits
have a minimum denomination requirement of
$10,000 and a maturity of 26 weeks. The ceiling
rate of interest on these deposits is indexed to the
discount rate (auction average) on most recently
issued 26-week U.S. Treasury bills. Interest on
these certificates may not be compounded. Effective for all 6-month money market certificates
issued beginning Nov. 1, 1981, depository institutions may pay rates of interest on these deposits
indexed to the higher of (1) the rate for 26-week
Treasury bills established immediately before the
date of deposit (bill rate) or (2) the average of
the four rates for 26-week Treasury bills established for the 4 weeks immediately prior to the
date of deposit (4-week average bill rate). Rate
ceilings are determined as follows:
Bill rate or 4-week
average bill rate
7.50 percent or below
Above 7.50 percent

7.25 percent or below
Above 7.25 percent, but
below 8.50 percent
8.50 percent or above,
but below
8.75 percent
8.75 percent or above

Commercial bank
ceiling
7.75 percent
V4 of 1 percentage
point plus the
higher of the bill
rate or 4-week
average bill rate
Thrift ceiling
7.75 percent
V2 of 1 percentage
point plus the
higher of the bill
rate or 4-week
average bill rate
9 percent
VA of 1 percentage
point plus the
higher of the bill
rate or 4-week
average bill rate

15. Effective Oct. 1, 1981, depository institutions
are authorized to issue all savers certificates
(ASCs) with a 1-year maturity and an annual
investment yield equal to 70 percent of the average
investment yield for 52-week U.S. Treasury bills
as determined by the auction of 52-week Treasury
bills held immediately before the calendar week in
which the certificate is issued. A maximum lifetime
exclusion of $1,000 ($2,000 on a joint return) from



gross income is generally authorized for interest
income from ASCs.
16. Effective Aug. 1, 1981, commercial banks
may pay interest on any variable ceiling nonnegotiable time deposit with an original maturity
of 2V£ years to less than 4 years at a rate not to
exceed VA of 1 percent below the average 2Vi-year
yield for U.S. Treasury securities as determined
and announced by the Treasury Department immediately before the date of deposit. Thrift institutions may pay interest on these certificates at a
rate not to exceed the average 2Vi-year yield for
Treasury securities as determined and announced
by the Treasury Department immediately before
the date of deposit. If the announced average
21/£-year yield for Treasury securities is less than
9.50 percent, commercial banks may pay 9.25 percent and thrift institutions 9.50 percent for these
deposits. These deposits have no required minimum denominations, and interest may be compounded on them. The ceiling rates of interest at
which they may be offered vary biweekly.
17. Between Jan. 1, 1980, and Aug. 1, 1981,
commercial banks, and thrift institutions were
authorized to offer variable ceiling nonnegotiable
time deposits with no required minimum denomination and with maturities of 2 & years or more.
V
Effective Jan. 1, 1980, the maximum rate for commercial banks was 34 percentage point below the
average yield on 2^-year U.S. Treasury securities;
the ceiling rate for thrift institutions was VA percentage point higher than that for commercial
banks. Effective Mar. 1, 1980, a temporary ceiling
of 11 % percent was placed on these accounts at
commercial banks and 12 percent on these accounts
at savings and loan associations. Effective June 2,
1980, the ceiling rates for these deposits at commercial banks and savings and loans was increased
VL percentage point. The temporary ceiling was
retained, and a minimum ceiling of 9.25 percent
for commercial banks and 9.50 percent for thrift
institutions was established.
18. Effective Dec. 1, 1981, depository institutions
were authorized to offer time deposits not subject
to interest rate ceilings when the funds are deposited to the credit of, or in which the entire
beneficial interest is held by, an individual pursuant to an IRA agreement or Keogh (H.R. 10)
plan. Such time deposits must have a minimum
maturity of 18 months, and additions may be made
to the time deposit at any time before its maturity
without extending the maturity of all or a portion
of the balance of the account.
NOTE. Before Mar. 31, 1980, the maximum
rates that could be paid by federally insured commercial banks, mutual savings banks, and savings
and loan associations were established by the
Board of Governors of the Federal Reserve System, the Board of Directors of the Federal Deposit
Insurance Corporation, and the Federal Home
Loan Bank Board under the provisions of 12 CFR
217, 329, and 526 respectively. Title II of the
Depository Institutions Deregulation and Monetary Control Act of 1980 (P.L. 96-221) transferred
the authority of the agencies to establish maximum rates of interest payable on deposits to the
Depository Institutions Deregulation Committee.
The maximum rates on time deposits in denominations of $100,000 or more with maturities of
30-89 days were suspended in June 1970; such
deposits maturing in 90 days or more were suspended in May 1973. For information regarding
previous interest rate ceilings on all types of accounts, see earlier issues of the Federal Reserve
Bulletin, the Federal Home Loan Bank Board
Journal, and the Annual Report of the Federal
Deposit Insurance Corporation.

240

Tables

15. Margin Requirements1
Percent of market value
For credit extended under Regulation T (brokers and dealers), U (banks),
G (others than brokers, dealers, or banks), and X (borrowers)

PflFprtivp daft*

Margin
stocks
1934—Oct. 1
1936—Feb. 1
Apr. 1
1937—Nov. 1
1945_Feb. 5
July 5
1946—j a n . 21
1947—Feb. 1
1949—Mar. 3
1951—j a n . 17
1953—Feb. 20
1955_jan. 4
„
Apr. 23
1958—Jan. 16
Aug. 5
Oct. 16
1960—July 28
1962—July 10 .
1963—Nov. 6
1968—Mar. 11
June 8
1970—May 6
1971—Dec. 6 . .
1972—Nov. 24
1974_jan. 3
1977__j an . 1

,

,

,

Convertible
bonds

25—45
25—55
55
40
50
75
100
75
50
75
50
60
70
50
70
90
70
50
70
70
80
65
55
65
50
50

1. Regulations T, U, G, and X, adopted by the
Board of Governors pursuant to the Securities
Exchange Act of 1934, limit the amount of credit
to purchase and carry "margin securities" and
"margin stock" (as defined in the regulations)
when such credit is collateralized by securities.
Margin requirements are the difference between
the market value (100 percent) and the maximum
loan value of collateral as prescribed by the




50
60
50
50
50
50
50

Short sales,
Tonly
(3)
(3)
(3)
50
50
75
100
75
50
75
50
60
70
50
70
90
70
50
70
70
80
65
55
65
50
50

Writing options,
T only 2

30

Board. Regulation T was adopted effective Oct. 15,
1934; Regulation U, effective May 1, 1936; Regulation G, effective Mar. 11, 1968; and Regulation
X, effective Nov. 1, 1971.
2. The margin is expressed as a percent of the
current market value of the stock underlying the
option.
3. The requirement was the margin "customarily
required" by the brokers and dealers.

Tables

241

»r,\* Commercial Banks
' v ; • s>

i Bar*

hi«i«i

-

! i i s : vi». W8O

Asset and liability items shown in millions of dollars
Insured commercial banks
Item

Insured
nonmember
banks

Member banks
Total

Total

National

State

June 30, 1981
Loans and investments, total
Loans
Gross
Net
Investments
U.S. Treasury securities ..
Other 2
Cash assets, total

1,254,571,029

896,067,568

698,592,975

197,474,593

358,503,461

935,553,555
906,260,065
319,017,474
104,382,813
214,634,661
205,066,605

688,311,079
668,195,340
207,756,489
66,067,542
141,688,947
169,062,440

536,851,518
521,259,373
161,741,457
50,435,342
111,306,115
115,727,269

151,459,561
146,935,967
46,015,032
15,632,200
30,382,832
53,335,171

247,242,476
238,064,725
111,260,985
38,315,271
72,945,714
36,004,165

Deposits, total

1,210,828,280
75,305,463
332,152,869
803,369,913
113,288,136

861,728,681
72,033,364
244,425,471
545,269,825
81,288,350

664,509,663
40,430,167
182,438,569
441,640,915
62,998,092

197,219,018
31,603,197
61,986,902
103,628,910
18,290,258

349,099,599
3,272,099
87,727,398
258,100,088
31,999,786

14,444

5,471

4,453

1,018

8,973

Loans and investments, total
Loans
Gross
Net
Investments
U.S. Treasury securities ..
Other 2
Cash assets, total

1,137,899,290

815,134,218

641,660,799

173,473,419

322,765,072

849,548,408
819,927,797
288,350,882
90,638,568
197,712,314
196,704,163

623,637,546
602,774,607
191,496,672
58,912,022
132,584,650
164,373,729

492,304,272
475,462,861
149,356,527
45,378,492
103,978,035
110,197,362

131,333,274
127,311,746
42,140,145
13,533,530
28,606,615
54,176,367

225,910,862
217,153,190
96,854,210
31,726,546
65,127,664
32,330,434

Deposits, total
Interbank
Other demand
Other time
Total equity capital

1,100,988,977
70,651,127
352,756,160
677,581,696
102,247,834

785,704,783
67,649,942
259,576,575
458,478,279
73,899,486

604,478,507
36,801,835
197,034,172
370,642,513
57,175,790

181,226,276
30,848,107
62,542,403
87,835,766
16,723,696

315,284,194
3,001,185
93,179,585
219,103,417
28,348,348

14,395

5,407

4,426

981

8,988

Other demand
Other time
Total equity capital
Number of banks

June 30, 1980

Number of banks

1. All insured commercial banks in the United
States.
2. Includes trading accounts for banks with
assets of less than $100 million.




NOTE. Details may not add to totals because of
rounding.

242

Tables

17. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related
Items—Year-End 1918-81, and Month-End 1981
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
U.S. government
securities

Total

Bought
outright10

Held
under
repur- Loans
chase
agreement

All
Float i other 2

Other
Federal
Reserve Total
assets 3

Gold
stock *

Special Treadraw- sury
ing
currights rency
certif- outicate standacing 5
counts

239
300

239
300

0 1,766
0 2,215

199
201

294
575

2,498
3,292

2,873
2,707

1,795
1,707

287
234
436
134
540

287
234
436
80
536

0
2,687
0 1,144
0
618
•4
723
4
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

375
315
617
228
511

367
312
560
197
488

8
3
57
31
23

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

739
817
1,855
2,437
2,430

686
775
1,851
2,435
2,430

43
42
4
2
0

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

2,431
2,430
2,564
2,564
2,484

2,430
2,430
2,564
2,564
2,484

1
0
0
0
0

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

2,184
2,254
6,189
11,543
18,846

2,184
2,254
6,189
11,543
18,846

0
0
0
0
0

3
3
6
5
80

80
94
471
681
815

10
14
10

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

24,262
23,350
22,559
23,333
18,885

24,262
23,350
22,559
23,333
18,885

0
0
0
0
0

249
163
85
223
78

578
580
535
541
534

2
1
1
1
2

0
0
0
0
0

15,091
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

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

3
5
4
2
1

0
0
0
0
0

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

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

27,384
28,881
30,820
33,593
37,044

26,984
30,478
28,722
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




Tables

243

Factors absorbing reserve funds

Currency
in
circulation

Treasury
cash
holdings 6

Deposits, other
than member bank
reserves, with
Federal Reserve Banks

Treasury

Foreign

Other

Other
Member bank
Other Federal
reserves
Federal Reserve
Reserve liabilities
accounts 3 and a With
Curcapital Federal
rency
ReReserve
and quired 8
Banks
coin 7

Excess 8

4,951
5,091

288
385

51
31

96
73

25
28

118
208

0
0

1,636
1,890

0
0

1,585
1,822

51
68

5,325
4,403
4,530
4,757
4,760

218
214
225
213
211

57
96
11
38
51

5
12
3
4
19

18
15
26
19
20

298
285
276
275
258

0
0
0
0
0

1,781
1,753
1,934
1,898
2,220

0
0
0
0
0

0
1,654
0
1,884
2,161

0
99
0
14
59

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

0
0
0
0
0

2,212
2,194
2,487
2,389
2,355

0
0
0
0
0

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
3,029

19
54
8
3
121

6
79
19
4
20

22
31
24
128
169

375
354
355
360
241

0
0
0
0
0

2,471
1,961
2,509
2,729
4,096

0
0
0
0
0

2,375
1,994
1,933
1,870
2,282

96
-33
576
859
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
634

29
99
172
199
397

226
160
235
242
256

253
261
263
260
251

0
0
0
0
0

5,587
6,606
7,027
8,724
11,653

0
0
0
0

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
20,499
25,307

2,213
2,215
2,193
2,303
2,375

368
867
799
579
440

1,133
774
793
1,360
1,204

599
586
485
356
394

284
291
256
339
402

0
0
0
0
0

14,026
12,450
13,117
12,886
14,373

0
0
0
0
0

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

977
393
870
1,123
821

862
508
392
642
767

446
314
569
547
750

495
607
563
590
106

0
0
0
0
0

15,915
16,139
17,899
20,479
16,568

0
0
0
0
0

14,457
15,577
16,400
19,277
15,550

1,458
562
1,499
1,202
1,018

27,741
29,206
30,433
30,781
30,509

1,293
1,270
1,270
761
796

668
247
389
346
563

895
526
550
423
490

565
363
455
493
441

714
746
839
907

in

0
0
0
0
0

17,681
20,056
19,950
20,160
18,876

0
0
0
0
0

16,509
19,667
20,520
19,397
18,618

1,172
389
-570
763
258

31,158
31,790
31,834
32,193
32,591

767
775
761
683
391

394
441
481
358
504

402
322
356
272
345

554
426
246
391
694

925
901
998
1,122
841

0
0
0
0
0

19,005
19,059
19,034
18,504
18,174

0
0
0
0
310

18,903
19,089
19,091
18,574
18,619

102
-30
-57
-70
-135

32,869
33,918
35,338
37,692
39,619

377
422
380
361
612

485
465
597
880
820

217
279
247
171
229

533
320
393
291
321

941
1,044
1,007
1,065
1,036

0
0
0
0
0

17,081
17,387
17,454
17,049
18,086

2,544
2,544
3,262
4,099
4,151

18,988
18,988
20,071
20,677
21,663

637
96
645
471
574

For notes see last two pages of table.




244

Tables

17. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related
Items—Year-End 1918-81, and Month-End 1981—Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
U.S. government
securities *

Period
Total

40,768

1965
1966

Bought
out
right 10

1967
1968
1969

44,316
49,150
52,937
57,154

40,478
43,655
48,980
52,937
57,154"

1970
1971
1972
1973
1974

62,142
70,804
71,230
80,495
85,714

Held
All
Other
under Loans Float 1 other 2 Federal
repurReserve
chase
assets 3
agreement
290

137
173

170
0
0

141
186
183

2,248
2,495
2,576
3,443
3,440

187

661

164
58
64

62,142
69,481
71,119
80,395
84,760

0
1,323
111
100
954

335
39
1,981
1,258
299

4,261
4,343
3,974
3,099
2,001

57
261
106
68
999

94,124
92,789
104,093 100,062
111,274 108,922
118,591 117,374
126,167 124,507
130,592 128,038
140,348 136,863

1,335
4,031
2,352
1,217
1,660
2,554
3,485

211
25
265
1,174
1,454
1,809
1,601

3,688
2,601
3,810
6,432
6,767
4,467
1,762

1,126

Jan. .. 125,908 125,908
Feb. .. 126,358 126,358
Mar. .. 126,822 126,388

0
434

0

1,304
1,249

2,280
1,545
3,261
2,156
2,542
2,506
1,251
2,229
2,811
1,690
2,177
1,762

1975
1976
1977
1978
1979
1980
1981P . . . .

193

991

954
587
704
776
195

Total

Gold
stock 4

Special Treadraw- sury
curing
rights rency
certif- outicate stand5
ac-

ing

counts

0
2,743

43,340
47,177
52,031
56,624
63,584

13,733
13,159
11,982
10,367
10,367

0
0
0
0
0

5,575
6,317
6,784
6,795
6,852

1,123
1,068
1,260
1,152
3,195

67,918
76,515
78,551
86,072
92,208

10,732
10,132
10,410
11,567
11,652

400
400

7,149
7,710
8,313
8,716
9,253

3,312 102,461
3,182 110,892
2,442 118,745
4,543 131,327
5,613 140,705
8,739 146,383
9,230 153,136

11,599
11,598
11,718
11,671
11,172
11,160
11,151

0
0
0

400
400

400
500

1,200
1,250
1,300
1,800
2,518
3,318

10,218
10,810
11,331
11,831
13,083
13,427
13,687

1981 P

Apr.
May

..
..

June ..
July ..
Aug. ..
Sept. ..

Oct. ..

Nov. ..
Dec.p .

128,407
127,031
128,711
132,226
133,216
132,991
131,651
135,987
140,348

128,407
127,031
128,711
130,248
133,216
132,991
131,651
133,872
136,863

0
0
0

1,978
0
0
0

2,115
3,485

656

2,333
1,366
1,010
1,027
1,254
2,486
924
232

1,601

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.
4. 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.




0

0
298
0
0
0
453
0
0
0
744

195

9,836
10,047
10,235
10,556
9,601
10,707
9,694
9,032
9,297
9,652
10,124
9,230

139,328
139,199
141,272
143,452
140,540
142,934
144,651
145,731
147,585
143,917
149,264
153,136

11,159
11,156
11,154
11,154

11,154

11,154
11,154
11,154
11,152
11,152
11,152

11,151

2,518
2,518
2,818
2,818
2,818
3,068
3,068
3,068
3,318
3,318
3,318
3,318

13,886
13,939
14,002
14,061
14,111
14,155
14,350
14,234
14,315
13,651
13,679

13,687

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.
7. Between Dec. 1, 1959, and Nov. 23, 1960,
part of the amount was allowed as reserves;
thereafter all was allowed.
8. 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-of-business figures for the reserve period 2 weeks previous to the report date.
9. Beginning Dec. 1, 1966, these securities include federal agency obligations held under repurchase agreements and beginning Sept. 29, 1971,
federal agency issues bought outright.
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.

Tables

245

17,—Continued

Factors absorbing reserve funds

Currency
in
circulation

Treasury
cash

Deposits, other
than member bank
reserves, with
Federal Reserve Banks

hrtiH
noiu-

ings c
Trea- Forsury eign

Other

u_
Other
Jve- Federal
utner
Federal quired Reserve
Reserve clear- Ha
11 aacbilities
counts 3 &
and 3 With
ances capital Federal
Reserve
Banks

Member bank
reserves 11

Currency
and
coin 7

Required 8

Excess 8 - 12

42,056
44,663
47,226
50,961
53,950

760
1,176
1,344
695
596

668
416
1,123
703
1,312

150
174
135
216
134

355
588
653
747
807

211
-147
—773
-1,353
0

0
0
0
0
0

0
0
0
0
1,919

18,447
19,779
21,092
21,818
22,085

4,163
4,310
4,631
4,921
5,187

22,848
24,321
25,905
27,439
28,173

-238
-232
-182
-700
-901

57,093
61,068
66,516
72,497
79,743

431
460
345
317
185

1,156
2,020
1,855
2,542
3,113

148
294
325
251
418

1,233
999
840

0
0
0
0
0

1,986
2,131
2,143
2,669
2,935

24,150
27,788
25,647
27,060
25,843

5,423
5,743
6,216
6,781
7,370

30,033
32,496
32,044
35,268
37,011

-460
1,035

1,275 M

0
0
0
0
0

-1,360
-3,798

86,547
93,717
103,811
114,645
125,600
136,829
144,774

483 7,285
460 110,393
392 7,114
240 4,196
494 4,075
441
3,062
443 4,301

353
352
379
368
429
411
505

1,090
1,357
1,187
1,256
1,412
617
781

0
0
0
0
0
0
0

0
0
0
0
0
0
117

2,968
3,063
3,292
4,275
4,957
4,671
5,261

26,052
25,158
26,870
31,152
29,792
27,456
25,111

8,036
8,628
9,421
10,538
11,429
13,654
15,576

35,197
35,461
37,615
42,694
44,217
40,558
42,145

—1,10314
-1,535
-1,265
—893
-2,835
675
-1,442

131,113
131,833
133,915
134,991
136,460
138,080
138,287
138,534
138,508
138,847
142,683
144,774

451
464
494
508
506
478
448
450
457
447
445
443

573
422
474
476
346
338
285
256

515
337
313
311
275
536
472
502

0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
45

573
715
781

0
0
0

82
99
117

26,621
26,734
26,164
26,063
24,304
23,626
26,011
27,000
27,180
23,590
24,213
25,111

13,767
12,925
12,777
13,596
13,793
13,858
14,171
14,164
15,649
15,293
15,412
15,576

40,221
39,479
39,642
41,089
39,855
40,830
40,392
40,831
41,009
40,521
41,230
42,145

278
287
-595
-1,342
— 1,671
—3,269

547
535
505

4,579
4,737
4,855
4,674
4,444
5,330
4,798
4,805
5,379
5,112
6,011
5,261

3,038
2,284
3,032
4,460
2,288
2,923
2,922
2,595
2,520
3,550
3,475
4,301

420

843

0

11. Beginning November 1979, includes reserves
of member banks, Edge Act corporations, and
U.S. agencies and branches of foreign banks.
Beginning Nov. 13, 1980, includes reserves of all
depository institutions.
12. Beginning with the week ending Nov. 15,
1972, figures include $450 million of reserve deficiencies on which Federal Reserve Banks are
allowed to waive penalities 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 1974.
13. Beginning July 1973, this item includes certain deposits of domestic nonmember banks and
foreign-owned banking institutions held with member banks and redeposited in full with Federal
Reserve Banks in connection with voluntary par-




63

9 8 12

— 154
381
1,860

-1,613
-1,583
-1,442

ticipation 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 foreign banks operating in the
United States, and (2) Eurodollar liabilities.
14. Beginning with the week ending Nov. 19,
1975, figures are adjusted to include waivers of
penalties for reserve deficiencies, in accordance
with 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,
Sept. 1, 1976), pp. 507-23.

246

Tables

18. Changes in Number of Banking Of]ices in the United Stales, 1981
Commercial banks (including stock savings
banks and nondeposit trust companies)
Type of office
and change

All
banks

Member
Total

Banks, Dec. 31,
1980
Changes during 1981
New banks
Ceased banking
operation .
Suspensions
Placed in receivershio
Banks converted
into branches
Other
Interclass changes
Nonmember to
national
Nonmember to
state

15,296
268
-1
-1

Nonmember

—1
-1

-2

-2

-213
-20

Mutual
savings
banks

Total

National

State Insured

14,836

5,422

4,425

997

9,000

414

323

267

124

99

25

75

68

1

-198
-19

Noninsured

_

-85
-9

14

-14
-2

-71
—7

14

-1

4

"111
—9

-2
~1

-2
-2

-24

.

2

.

2

-10

-10

.

-3

National to
noninsured

-23

-9

-2

National to non-

-1
—1

24

23
9

-14

-14

.

23

State member to
nonmember
National to state

-3

.

10 .
3

Noninsured to
insured
Insured mutual
to federal

Dec. 31,1981

137

-1

State member to

Net change

NonInsured insured

.

27

46

52

29

23

-72

66

-4
7

-26

15,323

14,882

5,474

4,454

1,020

8,928

4801

330

111




Tables

247

18.—Continued
Commercial banks (including stock savings
banks and nondeposit trust companies)
Type of office
and change

All
banks

Mutual
savings
banks

Nonmember

Member
Total

Branches and additional offices,
Dec. 31,1980 s
Changes during 1981
De novo
Banks converted .
Discontinued
Sale of branch . . .
lnterclass changes
Nonmember to
national . .
Nonmember to
state
member . . .
State member to
national . . .
State member to
nonmember
National to state
member
National to nonmember
Noninsured to
insured
mutual . . . .
Insured mutual
to federal
mutual
Insured nonmember to
insured
mutual
Other
Net change
Dec. 31,19812
Banking facilities
Dec. 31,19803
Changes during 1981
Established
Discontinued
Net change . .
Dec. 31,19813

Total

National

State

Insured

41,477

38,353

24,379

19,620

4,759

13,923

51

2,744

380

2,326
209
-364
-2

2,175
194
-332
-2

1,233
130
-212

908
110
-161
3

325
20
-51
-3

932
64
-119
-2

10

139
14
-32

12
1

280

280

128

-128

53
25

-123

-53

-25
-9

-81

-1

Noninsured

-280
53

-9

Noninsured Insured

9

81

-123

123

-139

-139

40
2,070

-4
21
2,052

30
1,382

17
978

13
404

661

43,547

40,405

25,761

20,598

5,163

14,584

156

156

135

124

11

60

2,872

270

-1
-1

10

5
-110

21

-1
-1

9

4
14
128

20

-5
-3

-5
-3

-4
-2

2
-3
-1

153

153

133

123

1. As of Dec. 31, 1981, includes 14 state member noninsured and 2 noninsured national trust
companies.
2. Figures exclude banking facilities.




-4
Q

3. Data include facilities provided at military and
other government establishments through arrangements made by the Treasury.

248

Tables

19. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors, 1981
American Bank of Commerce, Albuquerque, New Mexico, to merge with Republic Bank,
Albuquerque, New Mexico
SUMMARY REPORT BY THE ATTORNEY GENERAL (Undated)

The acquiring bank, American Bank of Commerce (Applicant), is a subsidiary of Bank
Securities, Inc. (BSI), a holding company that owns eight banks throughout New
Mexico. BSI has total consolidated deposits of $376,787,000, which represents 7.68 percent of statewide totals. Applicant operates eight offices, all in Albuquerque. BSI's
other subsidiary, First State Bank of Rio Rancho (First Bank), was the only bank in
neighboring Sandoval County until October 1980. First Bank operates four offices, with
total deposits of $34.1 million, and holds 1.8 percent of the total deposits in the
Sandoval-Bernalillo area. Republic Bank operates three offices, and has total deposits
of $36.5 million, including $12.9 million in demand deposits of individuals, partnerships,
and corporations (IPC).
The relevant market for consideration of the competitive effects of this merger is the
Albuquerque standard metropolitan statistical area, which consists of Bernalillo and
Sandoval Counties. The "Albuquerque Ranally Metro Area," as defined by the Rand
McNally Commercial Atlas, consists of only parts of Bernalillo County (but includes all
of Albuquerque) and Sandoval County. If the relevant market is defined to include both
counties, the merger would have the effect of eliminating direct competition and of
intensifying concentration in the market. BSI's two subsidiaries, Applicant and First
Bank, have a 7.5 percent share of the total deposits of the Bernalillo-Sandoval market;
the resulting bank would have 9.5 percent. However, even if the relevant geographic
market were, as Applicant contends, Bernalillo County exclusively, the market shares
would still be significant. Consummation of the proposed merger would eliminate direct
competition between the fourth and eighth largest banks in Albuquerque, as measured
by total deposits; and the resulting bank would have 7.8 percent of total deposits,
7.6 percent of IPC demand deposits, and 8 percent of net loans in Bernalillo County.
Applicant, with 5.7 percent of total deposits, is the fourth largest bank in the area. The
top three firms control 78.3 percent of total deposits and 77.4 percent of IPC demand
deposits. The top four control 84 percent of total deposits and 82.4 percent of IPC
demand deposits. The bank to be acquired, Republic Bank, is the eighth largest institution as measured by total deposits (2 percent), and the seventh largest as measured by
net loans (2.4 percent) and by IPC demand deposits (2.6 percent). The merger would
have an adverse effect on competition.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (2/5/81)

American Bank of Commerce, Albuquerque, New Mexico (Applicant), with assets of
$117 million, proposes to merge Republic Bank, Albuquerque, New Mexico (Bank),
with assets of $40 million. Applicant is a subsidiary of Bank Securities, Inc., Albuquerque
(BSI), which ranks fourth among New Mexico's commercial banking organizations, with
7.7 percent of deposits.
Two of BSI's subsidiary banks compete in the relevant Albuquerque Ranally Metro
Area, where BSI holds 7.4 percent of market deposits and ranks fourth among twelve
commercial banking organizations. If the merger is consummated, BSI would hold
9.3 percent of area deposits and would continue to rank fourth. While the proposed
merger would eliminate some competition within the market, BSI would remain substantially smaller in absolute size and market share than the three larger banking
organizations. Moreover, numerous independent banking alternatives would remain.
Consequently, the merger would not have a significant effect on competition in the
relevant area.
The Board also concludes that the financial and managerial resources and prospects
of the institutions involved, as well as the banking factors, are consistent with approval.
The bank resulting from the proposed merger will be able to offer increased lending
limits and other expanded services to its customers. In particular, it will offer trust
services, the convenience of automatic teller machines, and a debit-card system,




Tables

249

19.—Continued

services previously unavailable from Bank. The Board believes that considerations
relating to the convenience and needs of the communities to be served support approval
and are sufficient to outweigh any slightly adverse competitive effect. Accordingly, the
Board finds that consummation of the proposal is consistent with the public interest.
The Carroll County Trust Company, Conway, New Hampshire, to merge with Lafayette
National Bank, Littleton, New Hampshire
SUMMARY REPORT BY THE ATTORNEY GENERAL (1/29/81)

The proposed transaction would not have a substantial effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (2/17/81)

The Carroll County Trust Company (Applicant), with assets of $41 million, proposes
to merge Lafayette National Bank (Bank), with assets of $47 million. Applicant is a
subsidiary of Indian Head Banks, Inc., Nashua (IHB), which ranks first among
New Hampshire's commercial banking organizations, with 18.0 percent of the deposits.
After the merger, IHB would control 19.4 percent of state deposits.
Applicant's three offices are in the Conway market, while Bank's five offices are in
the Littleton market. None of IHB's commercial banking subsidiaries is represented in
the Littleton market, where Bank ranks first among six such organizations, with
42 percent of total deposits ($76 million). Three savings banks in the Littleton area
hold IPC time and savings deposits that range from $19 million to $77 million. Further,
the Littleton area does not appear to be attractive for the establishment of de novo
branches. Therefore, the competitive effect of the proposal would not be sufficiently
adverse for disapproval.
Both IHB and Applicant are in satisfactory condition, and the condition of the
resulting bank would be satisfactory.
The proposal would improve the level of services at the offices now operated by
Bank. Among the new or expanded services to be offered are industrial revenue loans,
lease financing, automatic teller machines, and trust services. Convenience and need
factors lend weight to approval.
First Virginia Bank-Colonial, Richmond, Virginia, to merge with The Peoples Bank of
Hanover County, Mechanicsville, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL (4/27/81)

The proposed transaction would have no effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (4/28/81)

First Virginia Bank-Colonial (Applicant), with assets of $65 million, proposes to merge
The Peoples Bank of Hanover County (Bank), with assets of $16 million. Applicant is a
subsidiary of First Virginia Banks, Inc., Falls Church (FVB), which ranks seventh among
Virginia's commercial banking organizations, with about 7 percent of the deposits held
by banking offices in the state.
The relevant market in this proposal is the Richmond area, where FVB controls less
than 2 percent of all deposits. If the proposed merger is consummated, the resulting
bank would hold less than 3 percent of area deposits. The merger would have no
significant adverse effects on competition, and would improve the level of services
available at the offices now operated by Bank. The financial and convenience and need
factors are consistent with approval.
United Virginia Bank, Richmond, Virginia, to merge with The First and Merchants
National Bank of Radford, Radford, Virginia
SUMMARY REPORT BY THE ATTORNEY GENERAL

(No report received.)



250

Tables

19. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors, 1981—Continued
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (6/25/81)

United Virginia Bank (Applicant), with assets of $3.5 billion, proposes to merge The
First and Merchants National Bank of Radford (Bank), with assets of $66 million.
Applicant is a subsidiary of United Virginia Bankshares Incorporated, Richmond (UVB),
a one-bank holding company that ranks first among banking organizations in the state.
If the proposed merger takes place, UVB's share of banking deposits in Virginia will
increase from 13.7 to 13.9 percent.
Proponents' closest offices are about 40 miles apart. Applicant is not represented in
the unconcentrated Radford market, where Bank, with 14.9 percent of area deposits,
ranks second among nine banks. The proposed merger would not have a significant
effect on competition.
Applicant proposes to expand the level of trust services available to Bank's customers
and to provide investment advisory services through an affiliate. Business and commercial
interests in the Radford market should benefit from higher loan limits and from various
forms of secured lending, including financing for equipment, inventory, and accounts
receivable and most types of cash management services. Applicant also plans to
install automated teller machines in the Radford market.
The banking factors are consistent with approval.
Chemical Bank, New York, New York, to acquire certain assets and assume certain
liabilities of a branch of Bankers Trust Company, New York, New York
SUMMARY REPORT BY THE ATTORNEY GENERAL (10/2/81)

The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (9/17/81)

Chemical Bank (Applicant), with assets of $41 billion, proposes to acquire certain
assets and assume certain liabilities of the branch of Bankers Trust Company (BTC)
at 76 East 161st Street, The Bronx. Deposits at the branch amount to $14 million.
The relevant market in this case is the New York metropolitan banking market.
Applicant ranks fourth among 106 commercial banks in this relatively unconcentrated
market, with 11.7 percent of the area's commercial bank deposits. The proposal, which
is part of a BTC plan to sell most of its retail branches, would not have a significant
effect on competition.
Inasmuch as this branch of BTC is the only commercial bank office serving the
neighborhood surrounding Yankee Stadium and The Bronx County Courthouse, the
proposal would insure continued availability of retail banking services in that area.
Considerations of convenience and need factors, including those relating to the
Community Reinvestment Act, are consistent with approval.
The proposed transaction would have no effect on Applicant's generally satisfactory
condition.
The Merrill Trust Company, Bangor, Maine, to acquire the assets and assume the
liabilities of The National Bank of Gardiner, Gardiner, Maine
SUMMARY REPORT BY THE ATTORNEY GENERAL (10/2/81)

The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (10/6/81)

The Merrill Trust Company (Applicant), with assets of $340 million, proposes to
acquire The National Bank of Gardiner (Bank), with assets of $14 million. Applicant
is a banking subsidiary of Merrill Bankshares Company, Bangor (Merrill), which
ranks fourth among commercial banking organizations in Maine, with 13.4 percent of
total deposits. The proposed acquisition would not alter Merrill's rank in Maine, and
the resulting organization would hold 13.8 percent of deposits in the state.
The sole office of Bank is in the Augusta banking market, where six of the state's




Tables

251

ten largest commercial banking organizations are represented. Although Applicant is not
represented in this market, another banking subsidiary of Merrill, Federal Trust Company,
Waterville (Federal), with deposits of $44 million, maintains four offices there. The
nearest offices of Federal and Applicant to Bank are about 30 and 50 miles away
respectively. Merrill ranks third among eight commercial banking organizations
in the Augusta market, with 15 percent of area deposits. While the proposed acquisition
would not alter Merrill's rank in this market, the resulting organization would control
19 percent of area deposits.
In Maine, savings banks and savings and loan associations are permitted to accept
demand deposits and to make commercial loans with certain restrictions. Almost threefourths of Bank's deposits are in the time and savings category. Because of the small
size of Bank, and because many commercial banking organizations and thrift institutions
—eight mutual savings banks and savings and loan associations and 31 credit unions—
compete in the Augusta area, the proposed acquisition would not have a substantial
adverse effect on competition.
With respect to convenience and need factors, if the proposed acquisition is
accomplished, Applicant plans to provide at the Gardiner office the following services
that are not offered by Bank: NOW accounts, automatic overdraft credit lines, letters
of credit, repurchase agreements, municipal finance, trust accounts, IRA and Keogh
accounts, and government-backed loans.
Bank has experienced financial and managerial problems that have reduced its
effectiveness as a competitor. The financial and managerial resources and prospects of
the proposed organization would benefit the operations at the office now occupied by
Bank without diminishing Applicant's prospects. The financial and managerial resources
and prospects of Applicant are satisfactory and, as a result of this proposal, Bank's
customers will be served by a stronger organization.
Isabella Bank and Trust, Mount Pleasant, Michigan to merge with The Blanchard
State Bank, Blanchard, Michigan
SUMMARY REPORT BY THE ATTORNEY GENERAL (8/7/81)

The proposed transaction would not have a substantial effect on competition.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (10/7/81)

Isabella Bank and Trust (Applicant), with assets of $75 million, proposes to merge
The Blanchard State Bank (Bank), with assets of $13 million.
Proponents' closest offices are 16 miles apart. Both banks operate offices in the
Isabella-Clare banking market, where Applicant, with 27.0 percent of area deposits,
ranks first among nine banking organizations. The resulting bank from the proposed
merger would hold 29.6 percent of the area's commercial bank deposits. However,
several large Michigan bank holding companies together control more than half of the
deposits in this market. Further, five thrift institutions, including one that is larger than
Applicant, operate offices in the same area. While the Board continues to view commercial banking as the relevant line of commerce in determining the competitive effects
of a proposal, the Board notes that numerous savings and loan associations and credit
unions operate in this banking market and that their activities further diminish the
competitive effects of this proposal. Accordingly, the Board finds that consummation of
the proposal will have only slightly adverse effects on competition.
Ordinarily, the combined market shares of Applicant and Bank might raise some
concern about the elimination of existing competition, but several facts in the record
indicate that market shares alone do not reflect the effects of this application on competition. Applicant's share of market deposits has declined over the past several years,
and Bank's share in the Isabella-Clare banking market has declined even more substantially over the same period. Moreover, the aggregate share of area deposits held by
the four and the seven largest banking organizations has also declined significantly.




252

Tables

19. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors, 1981—Continued
Bank's office in Six Lakes, Michigan, competes in the Montcalm County banking
market, which is adjacent to the Isabella-Clare banking market. Applicant currently
maintains no offices in the Montcalm County market, and the Board concludes that
consummation would not result in the loss of any significant amount of existing or
potential competition in that market. The Board also notes that Bank is not a dominant
organization within its banking market, where it ranks last of eight banking organizations
and holds less than 3 percent of the commercial bank deposits.
The financial and managerial resources and prospects of Applicant and Bank are
considered satisfactory. In connection with the proposed transaction, Applicant intends
to provide Bank with assistance in trust services, data processing, foreign currency
transactions, and the solicitation of credit-card customers. Thus, considerations relating
to the convenience and needs of the communities to be served are regarded as sufficient
to outweigh any slightly adverse competitive effects.
The Prineville Bank, Prineville, Oregon, to acquire certain assets and assume
substantially all of the liabilities of High Lakes Community Bank, LaPine, Oregon
SUMMARY REPORT BY THE ATTORNEY GENERAL

(No report received. Requests for reports on the competitive factors were dispensed
with, as authorized by the Bank Merger Act, to permit the Reserve Bank to act
immediately to safeguard depositors of High Lakes Community Bank.)
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (10/23/81)

The Prineville Bank (Applicant), with assets of $5 million, proposes to acquire certain
assets and assume substantially all of the liabilities of High Lakes Community Bank
(Bank), with assets of $4 million.
On the basis of information before the Reserve Bank, it is apparent that an
emergency situation exists that, pursuant to the provisions of the Bank Merger Act,
requires the Reserve Bank to act immediately, so as to safeguard Bank's depositors.
City Bank and Trust Company, Moberly, Missouri, to merge with Higbee Savings
Bank, Higbee, Missouri
SUMMARY REPORT BY THE ATTORNEY GENERAL (10/23/81)

The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (11/2/81)

City Bank and Trust Company (Applicant), with assets of $73 million, proposes to
merge Higbee Savings Bank (Bank), with assets of $2 million. Applicant is a subsidiary
of Central Bancompany, Jefferson City, which ranks seventh in the state among
commercial banking organizations, with 2.6 percent of the deposits.
In the relevant Randolph County banking market, Applicant ranks first among five
commercial banks, with 46.6 percent of area deposits. If the proposed merger were
consummated, Applicant would hold 48.2 percent of market deposits. The bank with the
second largest share of deposits is a subsidiary of Missouri's third largest commercial
banking organization. Three savings and loan associations, with total deposits ranging
from $27 million to $1.9 billion, are represented in Randolph County. Applicant's main
office and facility are situated 11 and 13 miles respectively north of Bank's sole office.
Because Bank is a small institution with a declining share of market deposits, it is not
viewed as a significant competitor in its market. Further, Bank is located in a sparsely
populated area near the edge of the Randolph County market.
If the proposed merger is completed, the resulting bank plans to offer NOW accounts,
24-hour automatic teller machines, and trust accounts at the Higbee office; and banking
hours at the Higbee office will be extended.
Banking factors and the convenience and need factors, including Community Reinvestment Act considerations, lend weight to approval.




Tables

253

K- I jna;:'kL

The Connecticut Bank and Trust Company, Hartford, Connecticut, to merge with
The National Bank of New England, East Haddam, Connecticut
SUMMARY REPORT BY THE ATTORNEY GENERAL (10/30/81)

The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (12/16/81)

The Connecticut Bank and Trust Company (Applicant), with assets of $3.1 billion,
proposes to merge The National Bank of New England, East Haddam (Bank), with
assets of $7 million. Applicant is the sole banking subsidiary of CBT Corporation,
Hartford, which is the largest commercial banking organization in Connecticut, with
18.6 percent of the deposits. The proposal would increase CBT Corporation's share of
deposits in the state by 0.1 percent. Bank's only office is about eight miles from the
nearest office of Applicant.
The relevant area in the case is the Hartford market, where Applicant ranks first
among 24 commercial banking organizations, with 35.9 percent of area commercial
bank deposits. The bank resulting from the proposed merger would hold 36 percent
of market deposits. However, thrift institutions control 77 percent of deposits held by
commercial banks and thrift organizations in the Hartford area; and home office protection would be removed from East Haddam after this merger.
With respect to convenience and needs, Applicant proposes to offer the following
new services at the East Haddam office of the resulting bank: trust services, international
banking services, residential mortgage loans, and pension and profit-sharing services.
The convenience and need factors, including Community Reinvestment Act considerations, lend slight weight to approval of the application.
The banking factors are consistent with approval.

The Connecticut Bank and Trust Company, Hartford, Connecticut, to merge with
The Southington Bank and Trust Company, Southington, Connecticut
SUMMARY REPORT BY THE ATTORNEY GENERAL (12/11/81)

The proposed transaction would not be significantly adverse to competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (12/31/81)

The Connecticut Bank and Trust Company (Applicant), with assets of $3.1 billion,
proposes to merge The Southington Bank and Trust Company (Bank), with assets of
$48 million. Applicant is the sole banking subsidiary of CBT Corporation, Hartford,
which is the largest commercial banking organization in the state, with 18.6 percent of
the deposits. If the proposed merger took place, CBT Corporation would hold 19.0
percent of the deposits held by commercial banking offices in Connecticut.
Proponents' closest offices are 3.6 miles apart. The relevant market in the proposal
is the Hartford market, where Applicant, with 35.9 percent of area deposits, ranks first
among 24 commercial banking organizations. If the proposed merger were consummated,
the resulting institution would hold 36.9 percent of area deposits. However, 38 mutual
savings banks and savings and loan associations plus 155 credit unions operate in this
area. Further, thrift institutions hold more than one and one-half times the deposits of
commercial banks. The financial condition of the two banks is satisfactory, as would
be that of the resulting bank. Applicant proposes to expand trust and international
services at the offices presently operated by Bank if the proposed merger is consummated.
Bank does not offer government-insured or government-guaranteed mortgages, which
would also be available at the Southington offices of the continuing bank. Convenience
and need factors, including considerations under the Community Reinvestment Act, lend
slight weight to approval.




254
19.

Tables
M

Mergers Approved Involving Wholly Owned Subsidiaries of the Same Bank Holding
Company
The following transactions involve banks that are subsidiaries of the same bank holding
company. In such cases, the Summary Report by the Attorney General indicates that
because the banks are wholly owned subsidiaries of the same bank holding company,
their proposed merger is essentially a corporate reorganization and therefore will have
no effect on competition. The Board of Governors, the Federal Reserve Bank, or the
Secretary of the Board of Governors, whichever approved the application, determined
that the competitive effects of the proposed transaction, the financial and managerial
resources, and the prospects of the banks concerned, as well as the convenience and
needs of the community to be served, were consistent with approval.

Name of bank, type of transaction,
and other banks involved1

Fidelity Union Trust Company, Newark, New Jersey
Merger
National Bank of New Jersey, Piscataway, New Jersey . . . .
Exchange Bank and Trust Company of Florida,
Tampa Florida
Merger
Exchange National Bank of Pinellas County,
Clearwater, Florida
Exchange National Bank of Pasco County,
Holiday Florida

of dollars)

Date of
approval by
Board or
Reserve Bank

1,274

2-27-81

Assets

258
522

114
35

The Harter Bank & Trust Company, Canton, Ohio
Merger
The First National Bank at Carrollton, Carrollton, Ohio . . . .

452

First Virginia Bank of Roanoke Valley, Roanoke, Virginia . .
Merger
First Virginia Bank-West, Narrows, Virginia

64

Central Trust Company Rochester New York, Rochester,
New York
Merger
The Citizens Central Bank, Arcade, New York

3-20-81

33

4-9-81

49
438

7-6-81

101

Central Bank of Birmingham, Birmingham, Alabama

845

Merger
Central Bank of Auburn, N.A., Auburn, Alabama
Central Bank of Alabama, N.A., Decatur, Alabama
Central Bank of Dothan, N.A., Dothan, Alabama
Central Bank of Eufaula, Eufaula, Alabama
Central Bank of Walker County, Jasper, Alabama
Central Bank of Mobile, N.A., Mobile, Alabama
Central Bank of Montgomery, Montgomery, Alabama
Central Bank of St. Clair County, Springville, Alabama
Central Bank of Tuscaloosa, N.A., Tuscaloosa, Alabama . . . .
Central Bank of Uniontown, Uniontown, Alabama

41
883
13
25
28
70
163
11
16
14




3-11-81

11-17-81

Tables

Name of bank, type of transaction,
and other banks involved x

AmeriTrust Company, Cleveland, Ohio
Merger
AmeriTrust Company of Northeastern, Ohio, N.A.,
Ashtabula, Ohio
AmeriTrust Company of Stark County, Canton, Ohio
AmeriTrust Company of Jefferson County,
Steubenville, Ohio
Ohio Citizens Bank, Toledo, Ohio
Merger
The Farmers and Merchants Deposit Company,
Swanton, Ohio

255

Assets
(millions
of dollars)

Date of
approval by
Board or
Reserve Bank

4,950

12-1-81

120
195
87
609

12-16-81

20

1. Each proposed transaction was to be effected under the charter of the first-named bank. The
table is in chronological order of approval.

Mergers Approved Involving a Nonoperating Institution with an Existing Bank
The following transactions have no significant effect on competition; they merely
facilitate the acquisition of the voting shares of a bank (or banks) by a holding
company. In such cases, the Summary Report by the Attorney General indicates that
the transaction will merely combine an existing bank with a nonoperating institution;
in consequence, and without regard to the acquisition of the surviving bank by the
holding company, the merger would have no effect on competition. The Board of
Governors, the Federal Reserve Bank, or the Secretary of the Board of Governors,
whichever approved the application, determined that the proposal would, in itself, have
no adverse competitive effects, and that the financial and convenience and need
factors were consistent with approval.

Assets
(millions
of dollars)

Date of
approval by
Board or
Reserve Bank

The Peoples Bank of Leslie, Leslie, Michigan
Merger
New Peoples State Bank of Leslie, Leslie, Michigan

22

1-16-81

Gaylord State Bank, Gaylord, Michigan
Merger
GSB Bank, Gaylord, Michigan

67

3-27-81

Name of bank, type of transaction,
and other banks involved1

Sussie State Bank, Forest Hill, Maryland
Merger
The Forest Hill State Bank, Forest Hill, Maryland .
Miles State Bank, St. Michael's, Maryland
Merger
St. Michael's Bank, St. Michael's, Maryland



5-28-81
46
5-28-81
13

256

Tables

19. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board o! Governors, 198 {-—Continued
Name of bank, type of transaction,
and other banks involved1

Gravois Avenue Bank, St. Louis, Missouri
Merger
Gravois Bank, St. Louis County, Missouri
First Interstate Bank of Great Falls, Great Falls, Montana . .
Merger
New Montana Bank, Great Falls, Montana
47 West Main Street Bank, Patchogue, New York
Merger
Island State Bank, Patchogue, New York
Mimbres Valley Bank, Deming, New Mexico
Merger
New Bank of Mimbres Valley, Deming, New Mexico
First Virginia Bank-Alleghany, Covington, Virginia
Merger
The Covington National Bank, Covington, Virginia

Assets
(millions
of dollars)

Date of
approval by
Board or
Reserve Bank

6-4-81
152
94

6-15-81

7-14-81
107
46

10-6-81

10-12-81
49

First Virginia Bank-Damascus, Damascus, Virginia
Merger
The Bank of Damascus, Inc., Damascus, Virginia

(2)

The FTB Fourth Bank, Mason, Ohio
Merger
The First-Mason Bank, Mason, Ohio

C)

Big Apple Bank, Richmond, Virginia
Merger
The Suburban Bank, Richmond, Virginia

(2)

12-4-81

34

12-28-81

28

12-29-81

11

1. Each proposed transaction was to be effected under the charter of the first-named bank. The
table is in chronological order of approval.
2. This is a newly organized bank, not in operation.




257

The Federal Reserve System
Boundaries of Federal Reserve Districts
and their Branch Territories

O
HAWAII

©

Legend

o
®
•
•

Boundaries of Federal Reserve Districts
Boundaries of Federal Reserve Branch Territories
Board of Governors of the Federal Reserve System
Federal Reserve Bank Cities
Federal Reserve Branch Cities
Federal Reserve Bank Facilities




Federal Reserve
Direc lanes and Meeting*




260

Directories and Meetings

Board of Governors of the Federal Reserve System
December 3 1 , 1 9 8 1

Term expires

PAUL A. VOLCKER of New Jersey, Chairman1
FREDERICK H. SCHULTZ of Florida, Vice Chairman1

January 31, 1992
January 31, 1982

NANCY H. TEETERS of Indiana
J. CHARLES PARTEE of Virginia
HENRY C. WALLICH of Connecticut
EMMETT J. RICE of New York
LYLE E. GRAMLEY of Missouri

January
January
January
January
January

OFFICE OF BOARD MEMBERS
JOSEPH R. COYNE, Asst. to the Board
DONALD J. WINN, Asst. to the Board
ANTHONY F. COLE, Special Asst. to the

Board
WILLIAM R. MALONI, Special Asst. to

31,
31,
31,
31,
31,

1984
1986
1988
1990
1994

OFFICE OF STAFF DIRECTOR
FOR FEDERAL RESERVE BANK
ACTIVITIES
THEODORE E. ALLISON, Staff Director
HARRY A. GUINTER, Asst. Director for

Contingency Planning

the Board
FRANK O'BRIEN, JR., Special Asst. to the

Board
JOSEPH S. SIMS, Special Asst. to the

Board
JAMES L. STULL, Manager, Operations

Review Program

OFFICE OF THE SECRETARY
WILLIAM W. WILES, Secretary
BARBARA R. LOWREY, Asst. Secretary
JAMES MCAFEE, Asst. Secretary
THEODORE E. DOWNING, JR., Asst.

Secretary

OFFICE OF STAFF DIRECTOR
FOR MONETARY A N D
FINANCIAL POLICY
STEPHEN H. AXILROD, Staff Director

EDWARD C. ETTIN, Deputy Staff Director
MURRAY ALTMANN, Asst. to the Board
STANLEY J. SIGEL, Asst. to the Board
NORMAND R.V. BERNARD, Special Asst.

to the Board

4

LEGAL DIVISION
MICHAEL BRADFIELD, General Counsel
ROBERT E. MANNION, Deputy General

Counsel
J. VIRGIL MATTINGLY, JR., ASSOC.

General Counsel
GILBERT T. SCHWARTZ, ASSOC. General

Counsel
MICHAEL E. BLEIER, Asst. General

Counsel
OFFICE OF STAFF DIRECTOR
FOR MANAGEMENT

MARYELLEN A. BROWN, Asst. to the

General Counsel

TONY J. SALVAGGIO, Acting Staff

Director2

JOHN M. DENKLER, Staff Director*
EDWARD T. MULRENIN, Asst. Staff

Director
JOSEPH W. DANIELS, SR., Director of

Equal Employment

Opportunity

1. The designations as Chairman and Vice
Chairman expire on Aug. 6, 1983, and July 27,
1983, respectively, unless the services of these
members of the Board shall have terminated
sooner.
2. On loan from the Federal Reserve Bank
of Dallas.
 of absence.
3. On leave


DIVISION OF RESEARCH
A N D STATISTICS
JAMES L. KICHLINE, Director
JOSEPH S. ZEISEL, Deputy Director
MICHAEL J. PRELL, ASSOC. Director

ROBERT A. EISENBEIS, Senior Deputy

Assoc. Director
JARED J. ENZLER, Senior Deputy
Director

Assoc.

ELEANOR J. STOCKWELL, Senior Deputy

Assoc.

Director

4. On loan from the Federal Reserve Bank
of Chicago.

Directories and Meetings

261

DIVISION OF RESEARCH
AND STATISTICS—Continued

DIVISION OF BANKING
SUPERVISION AND REGULATION

DONALD L. KOHN, Deputy Assoc.

JOHN E. RYAN, Director

Director
J. CORTLAND G.
Director

FREDERICK R. DAHL, ASSOC. Director
PERET,

Deputy Assoc.

HELMUT F. WENDEL, Deputy Assoc.

Director
MARTHA BETHEA, Asst. Director

JOE M. CLEAVER, Asst. Director
ROBERT M. FISHER, Asst. Director
DAVID E. LINDSEY, Asst. Director

LAWRENCE SLIFMAN, Asst. Director
FREDERICK M. STRUBLE, Asst. Director
STEPHEN P. TAYLOR, Asst. Director
LEVON H. GARABEDIAN, Asst. Director

(A dministration)

DON E. KLINE, ASSOC. Director
WILLIAM TAYLOR, ASSOC. Director
JACK M. EGERTSON, Asst. Director

ROBERT A. JACOBSEN, Asst. Director
ROBERT S. PLOTKIN, Asst. Director
THOMAS A. SIDMAN, Asst. Director
SAMUEL H. TALLEY, Asst. Director

M. HOMER, Securities Credit
Officer

LAURA

DIVISION OF CONSUMER AND
COMMUNITY AFFAIRS
JANET O. HART, Director

DIVISION OF INTERNATIONAL
FINANCE

GRIFFITH L. GARWOOD, Deputy Director
JERAULD C. KLUCKMAN, ASSOC. Director
GLENN E. LONEY, Asst. Director

EDWIN M. TRUMAN, Director

DOLORES S. SMITH, Asst. Director

ROBERT F. GEMMILL, ASSOC. Director
CHARLES J. SIEGMAN, ASSOC. Director
LARRY J. PROMISEL, Senior Deputy

DAVID L. SHANNON, Director

Assoc. Director
DALE W. HENDERSON, Deputy Assoc.

Director
SAMUEL PIZER, Staff Adviser
RALPH W. SMITH, JR., Asst. Director

DIVISION OF PERSONNEL
JOHN R. WEIS, Asst. Director
CHARLES W. WOOD, Asst. Director

DIVISION OF SUPPORT SERVICES
DONALD E. ANDERSON, Director

DIVISION OF FEDERAL
RESERVE BANK OPERATIONS
CLYDE H. FARNSWORTH, JR., Director
LORIN S. MEEDER, ASSOC. Director
WALTER ALTHAUSEN, Asst. Director

CHARLES W. BENNETT, Asst. Director
RICHARD B. GREEN, Asst. Director
EARL G. HAMILTON, Asst. Director

ELLIOTT C. MCENTEE, Asst. Director
DAVID L. ROBINSON, Asst. Director

P.D. RING, Adviser

5

HOWARD F. CRUMB, Acting Adviser

ROBERT E. FRAZIER, ASSOC. Director
WALTER W. KREIMANN, ASSOC. Director

OFFICE OF THE CONTROLLER
JOHN KAKALEC, Controller
GEORGE E. LIVINGSTON, Asst. Controller
DIVISION OF DATA PROCESSING
CHARLES L. HAMPTON, Director
BRUCE M. BEARDSLEY, Deputy Director
6
UYLESS D. BLACK, ASSOC. Director
GLENN L. CUMMINS, Asst. Director
NEAL H. HILLERMAN, Asst. Director

C. WILLIAM SCHLEICHER, JR., Asst.

Director
ROBERT J. ZEMEL, Asst. Director

5. On loan from the Federal Reserve Bank
of New York.



6. On leave of absence.

262

Directories and Meetings

Federal Open Market Corunntiee
December 31,1981

Members
PAUL A. VOLCKER, Chairman (Board of Governors)
ANTHONY M. SOLOMON, Vice Chairman (elected by

Federal Reserve Bank of New
York)
EDWARD G. BOEHNE (elected by Federal Reserve Banks of Boston, Philadelphia,
and Richmond)
ROBERT H. BOYKIN (elected by Federal Reserve Banks of Atlanta, St. Louis, and
Dallas)
E. GERALD CORRIGAN (elected by Federal Reserve Banks of Minneapolis, Kansas
City, and San Francisco)
LYLE E. GRAMLEY (Board of Governors)
SILAS KEEHN (elected by Federal Reserve Banks of Chicago and Cleveland)
J. CHARLES PARTEE (Board of Governors)
EMMETT J. RICE (Board of Governors)
FREDERICK H. SCHULTZ (Board of Governors)
NANCY H. TEETERS (Board of Governors)
HENRY C. WALLICH (Board of Governors)

Officers
STEPHEN H. AXILROD,

Staff Director
MURRAY ALTMANN,

Secretary

JOSEPH E. BURNS,

Associate Economist
RICHARD G. DAVIS,

Associate Economist

NORMAND R.V. BERNARD,

Assistant Secretary
NANCY M. STEELE,

Deputy Assistant Secretary
MICHAEL BRADFIELD,

General Counsel
JAMES H. OLTMAN,

Deputy General Counsel
ROBERT E. MANNION,

Assistant General Counsel
JAMES L. KICHLINE,

Economist

EDWARD C. ETTIN,

Associate Economist
DONALD J. MULLINEAUX,

Associate Economist
MICHAEL J. PRELL,

Associate Economist
KARL L. SCHELD,

Associate Economist
EDWIN M. TRUMAN,

Associate Economist
JOSEPH S. ZEISEL,

Associate Economist
D. STERNLIGHT, Manager for Domestic Operations,
System Open Market Account
SAM Y. CROSS, Manager for Foreign Operations,
System Open Market Account
During 1981, the Federal Open Mar- eral Open Market Committee" in this
ket Committee held ten meetings. (See REPORT.)
"Record of Policy Actions of the FedPETER




Directories and Meetings

263

Federal Advisory i V>/'/?aV
December 31,1981

Members
District No. 1—WILLIAM S. EDGERLY, Chairman of the Board and President,
State Street Bank and Trust Company, Boston, Massachusetts
District No. 2—DONALD C. PLATTEN, Chairman of the Board, Chemical Bank,
New York, New York
District No. 3—JOHN H. WALTHER, Chairman of the Board, New Jersey National
Corporation and New Jersey National Bank, Trenton, New Jersey
District No. A—MERLE E. GILLIAND, Chairman of the Board and Chief Executive
Officer, Pittsburgh National Bank, Pittsburgh, Pennsylvania
District No. 5—J. OWEN COLE, Chairman of the Board, First National Bank of
Maryland, Baltimore, Maryland
District No. 6—ROBERT STRICKLAND, Chairman, Trust Company of Georgia,
Atlanta, Georgia
District No. 7—ROBERT M. SURDAM, Chairman, National Bank of Detroit,
Detroit, Michigan
District No. 8—RONALD TERRY, Chairman of the Board, First Tennessee Bank,
N.A., Memphis, Tennessee
District No. 9—CLARENCE G. FRAME, President and Chief Executive Officer, First
National Bank of St. Paul, St. Paul, Minnesota
District No. 10—GORDON E. WELLS, Chairman of the Board, First National Bank
of Kansas City, Kansas City, Missouri
District No. 11—T.C. FROST, JR., Chairman of the Boards, Cullen/Frost Bankers,
Inc., and the Frost National Bank of San Antonio, San Antonio, Texas
District No. 12—CHAUNCEY E. SCHMIDT, Chairman of the Board, President, and
Chief Executive Officer, The Bank of California, N.A., San Francisco, California
Officers
MERLE E. GILLIAND, President
CHAUNCEY E. SCHMIDT, Vice President
HERBERT V. PROCHNOW, Secretary
WILLIAM J. KORSVIK, Associate Secretary

Directors
J. OWEN COLE

CLARENCE G. FRAME
ROBERT M. SURDAM

Meetings of the Federal Advisory
Council were held on February 5-6,
April 30-May 1, September 10-11, and
November 5-6, 1981. The Board of
Governors met with the council on February 6, May 1, September 11, and
November 6, 1981. 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 a year, and is authorized by the
Federal Reserve Act to consult and
advise the Board on all matters within
the jurisdiction of the Board,

264

Directories and Meetings

Consumer Advisory Council
December 31,1981
RALPH J. ROHNER, Washington, D.C,

Chairman

CHARLOTTE H. SCOTT, Charlottesville, Virginia, Vice Chairman
ARTHUR F. BOUTON,

Little Rock, Arkansas
JULIA H. BOYD,

Alexandria, Virginia
ELLEN BROADMAN,

Washington, D.C.
JAMES L. BROWN,

Milwaukee, Wisconsin
MARK E. BUDNITZ,

Atlanta, Georgia
JOSEPH N. CUGINI,

Westerly, Rhode Island
RICHARD S. D'AGOSTINO,

Philadelphia, Pennsylvania
SUSAN PIERSON D E WITT,

Springfield, Illinois
JOANNE S. FAULKNER,

New Haven, Connecticut
LUTHER GATLING,

New York, New York
VERNARD W. HENLEY,

Richmond, Virginia
JUAN JESUS HINOJOSA,

F. THOMAS JUSTER,

Ann Arbor, Michigan
RICHARD F. KERR,

Palm City, Florida
HARVEY M. KUHNLEY,

Minneapolis, Minnesota
THE REV. ROBERT J. M C E W E N , S.J.,

Chestnut Hill, Massachusetts
STAN L. MULARZ,

Chicago, Illinois
WILLIAM J. O'CONNOR, JR.,

Buffalo, New York
MARGARET REILLY-PETRONE,

Upper Montclair, New Jersey
RENE REIXACH,

Rochester, New York
FLORENCE M. RICE,

New York, New York
HENRY B. SCHECHTER,

Washington, D.C.
PETER D. SCHELLIE,

Washington, D.C.
NANCY Z. SPILLMAN,

McAllen, Texas

Los Angeles, California

SHIRLEY T. HOSOI,

RICHARD A. V A N WINKLE,

Los Angeles, California
GEORGE S. IRVIN,

Salt Lake City, Utah
MARY W. WALKER,

Meetings between
Denver, Colorado the Consumer Ad- which is composed of creditors, conMonroe, Georgia
visory Council and members of the sumers, and others, was established
Board of Governors were held on Jan- pursuant to the Equal Credit Opportuuary 14-15, April 15-16, July 29-30, nity Act to advise the Board on conand October 28-29, 1981. The council, sumer-related matters.




Directories and Meetings

265

Federal Reserve Banks and Brandies
December 31,1981

Chairmen and Deputy iJhairmen 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
Robert P. Henderson
Robert H. Knight, Esq.
John W. Eckman
J.L. Jackson
Maceo A. Sloan
William A. Fickling, Jr.
John Sagan
Armand C. Stalnaker
Stephen F. Keating
Paul H. Henson
Gerald D. Hines
Cornell C. Maier

Conference of Chairmen
The chairmen of the Federal Reserve
Banks are organized into a Conference
of Chairmen that meets to consider
matters of common interest and to
consult with and advise the Board of
Governors. Such meetings, attended
also by the deputy chairmen, were held
in Washington on June 7-8 and December 3-4, 1981.
The Executive Committee of the
Conference of Chairmen during 1981
comprised Stephen F. Keating, Chairman, Cornell C. Maier, Vice Chairman,
and John Sagan, member.
On December 4, 1981, John Sagan
was elected chairman of the conference
and of its Executive Committee to serve
for the succeeding year; William A.
Fickling, Jr. was elected vice chairman
of the conference and a member of the
Executive Committee; and Paul H.
Henson was elected as the other member of the Executive Committee.

Directors
Class A and Class B directors are
elected by the member banks of a
Federal Reserve District. Class C directors are appointed by the Board of

Governors of the Federal Reserve Sys

Deputy Chairman
Thomas I. Atkins
Boris Yavitz
Jean A. Crockett
William A. Knoell
Steven Muller
John H. Weitnauer, Jr.
Stanton R. Cook
William B. Walton
William G. Phillips
Doris M. Drury
John V. James
Caroline L. Ahmanson

tem. 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 Class 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.
Branches of Federal Reserve Banks
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 boards are selected
from among directors appointed by the
Board of Governors.

266

Directories and Meetings
Term
expires
Dec. 31

District 1—BOSTON
Class A
Fred A. White

President, Dartmouth National Bank of
Hanover, Hanover, New Hampshire . . .
H. Alan Timm
President, Bank of Maine, N.A., Augusta,
Maine
Henry S. Woodbridge, Jr. .Chairman of the Board and Chief Executive
Officer, Rhode Island Hospital Trust National Bank, Providence, Rhode Island . .

Class B
Robert D. Kilpatrick . . . . President and Chief Executive Officer, Connecticut General Insurance Corporation,
Hartford, Connecticut
Carol R. Goldberg
Senior Vice President, The Stop & Shop
Companies, Inc., Boston, Massachusetts
Joseph A. Baute
Chairman and Chief Executive Officer,
Markem Corporation, Keene, New Hampshire
Class C
Robert P. Henderson . . . .Chairman and Chief Executive Officer, Itek
Corporation, Lexington, Massachusetts . .
Thomas I. Atkins
General Counsel, National Association for
the Advancement of Colored People, New
York, New York
Michael J. Harrington . . .Chairman of the Board, Harrington, Keefe,
and Schork, Inc., Lynnfield, Massachusetts

1981
1982
1983

1981
1982
1983

1981
1982
1983

District 2—NEW YORK
Class A
James Whelden
Gordon T. Wallis
Peter D. Kiernan

President, Ballston Spa National Bank,
Ballston Spa, New York
Chairman of the Board, Irving Trust Company, New York, New York
Chairman and President, United Bank Corporation of New York, Albany, New York

Class B
Edward L. Hennessy, Jr. .Chairman of the Board, Allied Corporation,
Morristown, New Jersey
William S. Cook
President, Union Pacific Corporation, New
York, New York
John R. Opel
President and Chief Executive Officer, International Business Machines Corporation,
Armonk, New York



1981
1982
1983

1981
1982
1983

Directories and Meetings

Class C
Gertrude G. Michelson . . Senior Vice President, R.H. Macy & Company, Inc., New York, New York
Boris Yavitz
Dean, Graduate School of Business, Columbia University, New York, New York . .
Robert H. Knight, Esq. . .Partner, Shearman and Sterling, Attorneys,
New York, New York

267
Term
expires
Dec. 31
1981
1982
1983

BUFFALO BRANCH
Appointed by Federal Reserve Bank
Robert J. Donough
President, Liberty National Bank and Trust
Company, Buffalo, New York
M. Jane Dickman
Partner, Touche Ross & Co., Buffalo, New
York
Arthur M. Richardson . . .President and Chief Executive Officer, Security Trust Company, Rochester, New
York
Carl F. Ulmer
President, The Evans National Bank of
Angola, Angola, New York
Appointed by Board of Governors
George L. Wessel
President, Buffalo AFL-CIO Council, Buffalo, New York
Frederick D. Berkeley III.Chairman of the Board and President, Graham Manufacturing Company, Inc., Batavia, New York
John R. Burwell
President, Rollins Container Corporation,
Rochester, New York

1981
1982
1982
1983

1981
1982
1983

District 3—PHILADELPHIA
Class A
Robert H. Deacon
Donald J. Seebold
Roger S. Hillas
Class B
Richard P. Hauser
Eberhard Faber IV
Harry A. Jensen



President, The Bank of Mid-Jersey, Bordentown, New Jersey
President, The First National Bank of Danville, Danville, Pennsylvania
Chairman and President, Provident National
Bank, Philadelphia, Pennsylvania
Chairman and Chief Executive Officer, John
Wanamaker, Philadelphia, Pennsylvania .
Chairman of the Board and Chief Executive
Officer, Eberhard Faber, Inc., WilkesBarre, Pennsylvania
President and Chief Executive Officer, Armstrong World Industries, Inc., Lancaster,
Pennsylvania

1981
1982
1983

1981
1982
1983

268

Directories and Meetings
Term
expires
Dec. 31

Class C
John W. Eckman

Chairman and Chief Executive Officer,
Rorer Group Inc., Fort Washington,
Pennsylvania
Jean A. Crockett
Chairman, Department of Finance, and Professor of Finance, Wharton School, University of Pennsylvania, Philadelphia,
Pennsylvania
Robert M. Landis, Esq. . .Partner, Dechert Price & Rhoads, Philadelphia, Pennsylvania

1981

1982
1983

District 4—CLEVELAND
Class A
Everett L. Maffett
John W. Alford
J. David Barnes

President and Chief Executive Officer, Eaton
National Bank & Trust Co., Eaton, Ohio
Chairman of the Board and Chief Executive
Officer, The Park National Bank, Newark,
Ohio
Chairman of the Board, Mellon Bank, N.A.,
Pittsburgh, Pennsylvania

1981
1982
1983

Class B
Jeffery A. Robb

Managing Partner, Audit Division, Proctor,
Robb and Company, Granville, Ohio . . .
John W. Kessler
President, John W. Kessler Company, Columbus, Ohio
E. Mandell de Windt . . . . Chairman of the Board, Eaton Corporation,
Cleveland, Ohio
Class C
J.L. Jackson
John D. Anderson
William H. Knoell

Executive Vice President and President—
Coal Unit, Diamond Shamrock Corporation, Lexington, Kentucky
Senior Partner, The Andersons, Maumee,
Ohio
President and Chief Executive Officer, Cyclops Corporation, Pittsburgh, Pennsylvania

1981
1982
1983

1981
1982
1983

CINCINNATI BRANCH
Appointed by Federal Reserve Bank
Lawrence C. Hawkins . . .Senior Vice President, University of Cincinnati, Cincinnati, Ohio
Elden Houts
Chairman of the Board and President, The
Citizens Commercial Bank and Trust
Company, Celina, Ohio
Oliver W. Birckhead . . . .Chairman of the Board and Chief Executive
Officer, The Central Trust Company,

N.A., Cincinnati, Ohio


1981
1981
1982

Directories and Meetings

O.T. Dorton

President, Citizens National Bank, Paintsville, Kentucky

Appointed by Board of Governors
Martin B. Friedman
Director, Formica Corporation, Cincinnati,
Ohio
Sister Grace Marie Hiltz President, Sisters of Charity Health Care,
Systems, Inc., Cincinnati, Ohio
Clifford R. Meyer
Executive Vice President, Cincinnati Milacron Inc., Cincinnati, Ohio

269
Term
expires
Dec. 31
1983

1981
1982
1983

PITTSBURGH BRANCH
Appointed by Federal Reserve Bank
Thomas V. Manseli
President and Chief Executive Officer, First
National Bank of Western Pennsylvania,
New Castle, Pennsylvania
R. Burt Gookin
Director, HJ. Heinz Co., Pittsburgh,
Pennsylvania
William D. McKain
President, Wheeling National Bank, Wheeling, West Virginia
Ernest L. Lake
President, The National Bank of North East,
North East, Pennsylvania
Appointed by Board of Governors
Quentin C. McKenna . . .President and Chief Executive Officer, Kennametal Inc., Latrobe, Pennsylvania . . .
Robert S. Kaplan
Dean, Graduate School of Industrial Administration, Carnegie-Mellon University,
Pittsburgh, Pennsylvania
Milton G. Hulme, Jr. . . .President and Chief Executive Officer, Mine
Safety Appliances Company, Pittsburgh,
Pennsylvania

1981
1981
1982
1983

1981
1982
1983

District 5—RICHMOND
Class A
Vincent C. Burke, Jr. . . .Chairman of the Board and Chief Executive
Officer, The Riggs National Bank, Washington, D.C
William M. Dickson
President and Senior Trust Officer, First
National Bank in Ronceverte, Ronceverte,
West Virginia
J. Banks Scarborough . . .Chairman and President, Pee Dee State
Bank, Timmonsville, South Carolina . . . .

1981
1982
1983

Class B
Paul G. Miller

Chairman of the Board and Chief Executive
Officer, Commercial Credit Company,
Baltimore, Maryland
James A. Chapman, Jr. . .Chairman of the Board and Chief Executive
Officer, Inman Mills, Inman, South Caro
lina


1981
1982

270

Directories and Meetings

Leon A. Dunn, Jr

Class C
Maceo A. Sloan

Paul E. Reichardt
Steven Muller

Chairman, President, and Chief Executive
Officer, Guardian Corporation and Subsidiaries, Rocky Mount, North Carolina .
Executive Vice President and Chief Operating Officer, North Carolina Mutual Life
Insurance Company, Durham, North
Carolina
Chairman of the Board and Chief Executive
Officer, Washington Gas Light Company,
Washington, D.C
President, The Johns Hopkins University,
Baltimore, Maryland
,

Term
expires
Dec. 31
1983

1981
1982
1983

BALTIMORE BRANCH
Appointed by Federal Reserve Bank
Pearl C. Brackett
Assistant/ Deputy Manager, Baltimore Regional Chapter of American Red Cross,
Baltimore, Maryland
Hugh D. Shires
President and Chief Executive Officer, The
First National Bank and Trust Company
of Western Maryland, Cumberland, Maryland
A.R. Reppert
President, The Union National Bank of
Clarksburg, Clarksburg, West Virginia .
Joseph M. Gough, Jr. . . .President, The First National Bank of St.
Mary's, Leonardtown, Maryland
Appointed by Board of Governors
Vacant
Edward H. Covell
Vice President for Governmental and Industry Affairs, Country Pride Foods Limited,
Easton, Maryland
Robert L. Tate
Chairman, Tate Industries, Baltimore, Maryland

1981

1982
1982
1983
1981
1982
1983

CHARLOTTE BRANCH
Appointed by Federal Reserve Bank
Hugh M. Chapman
Chairman of the Board, The Citizens &
Southern National Bank of South Carolina, Columbia, South Carolina
J.B. Aiken, Jr
Chairman of the Board, Guaranty Bank and
Trust Company, Florence, South Carolina
W.B. Apple, Jr
President, First National Bank of Reidsville,
Reidsville, North Carolina
Nicholas W. Mitchell . .. .Chairman of the Board, Piedmont Federal
Savings and Loan Association, Winston
Salem, North Carolina


1981
1982
1982
1983

Directories and Meetings

Appointed by Board of Governors
Henry Ponder
President, Benedict College, Columbia,
South Carolina
Naomi G. Albanese . . • .Dean, School of Home Economics, University of North Carolina at Greensboro,
Greensboro, North Carolina
William S. Lee III
President and Chief Operating Officer, Duke
Power Company, Charlotte, North Carolina

271
Term
expires
Dec. 31
1981
1982
1983

District 6—ATLANTA
Class A
Guy W. Botts
Dan B. Andrews
Hugh M. Willson

Chairman of the Board, Barnett Banks of
Florida, Inc., Jacksonville, Florida . . . .
President, First National Bank, Dickson,
Tennessee
President, Citizens National Bank, Athens,
Tennessee

1981
1982
1983

Class B
Floyd W. Lewis

Chairman of the Board and Chief Executive
Officer, Middle South Utilities, Inc., New
Orleans, Louisiana
Jean Me Arthur Davis . . .President, Me Arthur Dairy, Inc., Miami,
Florida
Harold B. Blach, Jr
President, Blach's Inc., Birmingham, Alabama

1981
1982
1983

Class C
Fred Adams, Jr

President, Cal-Maine Foods, Inc., Jackson,
Mississsippi
John H. Weitnauer, Jr. . . Chairman and Chief Executive Officer, Richway, Atlanta, Georgia
William A. Fickling, Jr. . .Chairman and Chief Executive, Charter
Medical Corporation, Macon, Georgia . .

1981
1982
1983

BIRMINGHAM BRANCH
Appointed by Federal Reserve Bank
Guy H. Caffey, Jr
Chairman and Chief Executive Officer,
Southern Bancorporation of Alabama and
Birmingham Trust National Bank, Birmingham, Alabama
C. Gordon Jones
President and Chief Executive Officer, First
National Bank of Decatur, Decatur, Alabama
Martha A. Mclnnis . .. .Executive Vice President, Alabama Environmental Quality Association, Montgomery,
Alabama
Henry A. Leslie
President and Chief Executive Officer, Union
Bank and Trust Company, Montgomery,

Alabama


1981
1982
1982
1983

272

Directories and Meetings

Appointed by Board of Governors
Louis J. Willie
Executive Vice President, Booker T. Washington Insurance Company, Birmingham,
Alabama
William H. Martin III . . .President and Chief Executive Officer,
Martin Industries, Inc., Florence, Alabama
Samuel R. Hill, Jr
President, University of Alabama in Birmingham, Birmingham, Alabama

Term
expires
Dec. 31
1981
1982
1983

JACKSONVILLE BRANCH
Appointed by Federal Reserve Bank
Vacant
Whitfield M. Palmer, Jr. .Chairman, Mid-Florida Mining Company,
Ocala, Florida
Billy J. Walker
President, Atlantic Bancorporation, Jacksonville, Florida
Gordon W. Campbell . . .President and Chief Executive Officer, Exchange Bancorporation, Inc., Tampa,
Florida
Appointed by Board of Governors
Jerome P. Keuper
President, Florida Institute of Technology,
Melbourne, Florida
Copeland D. Newbern . . .Chairman of the Board, Newbern Groves,
Inc., Tampa, Florida
Joan W. Stein
Partner, Regency Square Shopping Center,
Jacksonville, Florida

1981
1982
1982
1983

1981
1982
1983

MIAMI BRANCH
Appointed by Federal Reserve Bank
Jane C. Cousins
Realtor, Cousins Associates, Inc., Miami,
Florida
Alfred W. Roepstorff . . .President, National Bank of Collier County,
Marco Island, Florida
M.G. Sanchez
President and Chief Executive Officer, First
Bankers Corporation of Florida, Pompano
Beach, Florida
Daniel S. Goodrum
President and Chief Executive Officer, Century Banks, Inc., Ft. Lauderdale, Florida
Appointed by Board of Governors
Roy Vandegrift, Jr
President, Vandergrift-Williams' Farms,
Inc., Pahokee, Florida
David H. Rush
President, ACR Electronics, Inc., Hollywood, Florida
Eugene E. Cohen
Chief Financial Officer and Treasurer,
Howard Hughes Medical Institute, Coco
nut Grove, Florida


1981
1981
1982
1983

1981
1982
1983

Directories and Meetings

NASHVILLE BRANCH
Appointed by Federal Reserve Bank
Ruth W. Ellis
President, Mountain Empire Bank, Johnson
City, Tennessee
Charles J. Kane
Chairman and Chief Executive Officer, Third
National Bank in Nashville, Nashville,
Tennessee
John R. King
President, The Mason and Dixon Lines, Inc.,
Kingsport, Tennessee
James F. Smith, Jr
Chairman and Chief Executive Officer, Park
National Bank, Knoxville, Tennessee . . .
Appointed by Board of Governors
John C. Bolinger, Jr
Management Consultant, Hamilton House
No. 130, Knoxville, Tennessee
Cecelia Adkins
Executive Director, Sunday School Publishing Board, Nashville, Tennessee
Robert C.H. Mathews, Jr. .Managing General Partner, R.C. Mathews,
Contractor, Nashville, Tennessee

273
Term
expires
Dec. 31

1981
1982
1982
1983

1981
1982
1983

NEW ORLEANS BRANCH
Appointed by Federal Reserve Bank
Robert H. Bolton
President, Rapides Bank and Trust Company, Alexandria, Louisiana
Patrick A. Delaney
Chairman of the Board and President, Whitney National Bank of New Orleans, New
Orleans, Louisiana
Ben M. Radcliff
President, Ben M. Radcliff Contractor, Inc.,
Mobile, Alabama
Paul W. McMullan
Chairman and Chief Executive Officer, First
Mississippi National Bank, Hattiesburg,
Mississippi
Appointed by Board of Governors
Horatio C. Thompson . . .President, Horatio Thompson Investment,
Inc., Baton Rouge, Louisiana
Levere C. Montgomery . .Chairman, Time Saver Stores, Inc., New
Orleans, Louisiana
Leslie B. Lampton
President, Ergon, Inc., Jackson, Mississippi

1981
1982
1982
1983

1981
1982
1983

District 7—CHICAGO
Class A
Roger E. Anderson

Chairman of the Board, Continental Illinois
National Bank and Trust Company of
Chicago, Chicago, Illinois
Patrick E. McNarny . .. .President, First National Bank of Logansport, Logansport, Indiana
Ollie Jay Tomson
President, The Citizens National Bank of

Charles City, Charles City, Iowa


1981
1982
1983

274

Directories and Meetings

Class B
Dennis W. Hunt
Mary Garst
Leon T. Kendall
Class C
Edward F. Brabec
Stanton R. Cook
John Sagan

Term
expires
Dec. 31
President, Hunt Truck Lines, Inc., Rockwell
City, Iowa
Manager of Cattle Division, Garst Company,
Coon Rapids, Iowa
President, Mortgage Guaranty Insurance
Corporation, Milwaukee, Wisconsin . ..
Business Manager, Chicago Journeymen
Plumbers Local Union 130, U.A., Chicago, Illinois
President, Tribune Company, Chicago,
Illinois
Vice President-Treasurer, Ford Motor Company, Dearborn, Michigan

1981
1982
1983

1981
1982
1983

DETROIT BRANCH
Appointed by Federal Reserve Bank
Thomas R. Ricketts . . . .Chairman and President, Standard Federal
Savings and Loan Association, Troy,
Michigan
James H. Duncan
Chairman and Chief Executive Officer, First
American Bank Corporation, Kalamazoo,
Michigan
Dean E. Richardson . .. .Chairman, Manufacturers National Bank of
Detroit, Detroit, Michigan
Lawrence A. Johns
President, Isabella Bank and Trust, Mount
Pleasant, Michigan
Appointed by Board of Governors
Herbert H. Dow
Director and Secretary, The Dow Chemical
Company, Midland, Michigan
Russell G. Mawby
President and Trustee, W.K. Kellogg Foundation, Battle Creek, Michigan
Karl D. Gregory
Professor of Economics and Management,
School of Economics and Management,
Oakland University, Rochester, Michigan

1981
1981
1982
1983

1981
1982
1983

District 8—ST. LOUIS
Class A
George M. Ryrie

President, First National Bank & Trust Co.,
Alton, Illinois
Donald L. Hunt
President, First National Bank of Marissa,
Marissa, Illinois
Clarence C. Barksdale . .Chairman and Chief Executive Officer, First
National Bank in St. Louis, St. Louis,

Missouri


1981
1982
1983

Directories and Meetings

Class B
Tom K. Smith, Jr
Mary P. Holt
Frank A. Jones, Jr

St. Louis, Missouri
President, Clothes Horse, Little Rock, Arkansas
President, Dietz Forge Company, Memphis,
Tennessee

275
Term
expires
Dec. 31
1981
1982
1983

Class C
William B. Walton

Vice Chairman of the Board Emeritus, Holiday Inns, Inc., Memphis, Tennessee . . . .
Armand C. Stalnaker . . . .Chairman of the Board, General American
Life Insurance Co., St. Louis, Missouri . .
William H. Stroube
Associate Dean, Department of Agriculture,
Western Kentucky University, Bowling
Green, Kentucky

1981
1982
1983

LITTLE ROCK BRANCH
Appointed by Federal Reserve Bank
Gordon E. Parker
Chairman of the Board and President, The
First National Bank of El Dorado, El
Dorado, Arkansas
Shirley J. Pine
Professor, Program in Communicative Disorders, University of Arkansas at Little
Rock, Little Rock, Arkansas
William H. Bowen
Chairman and Chief Executive Officer, The
Commercial National Bank of Little Rock,
Little Rock, Arkansas
William H. Kennedy, Jr. .Chairman of the Board, National Bank of
Commerce of Pine Bluff, Pine Bluff, Arkansas
Appointed by Board of Governors
G. Larry Kelley
President, Pickens-Bond Construction Company, Little Rock, Arkansas
E. Ray Kemp, Jr
Vice Chairman of the Board and Chief Administrative Officer, Dillard Department
Stores, Inc., Little Rock, Arkansas . . . .
Richard V. Warner
Group Vice President, Wood Products
Group, Potlatch Corporation, Warren,
Arkansas

1981
1981
1982
1983

1981
1982
1983

LOUISVILLE BRANCH
Appointed by Federal Reserve Bank
Fred B. Oney
President, The First National Bank of Carrollton, Carrollton, Kentucky
William C. Ballard, Jr. . .Executive Vice President-Finance and
Administration, Humana, Inc., Louisville,

Kentucky


1981
1981

276

Directories and Meetings

Howard Brenner
Frank B. Hower, Jr

Vice Chairman of the Board, Tell City National Bank, Tell City, Indiana
Chairman and Chief Executive Officer,
Liberty National Bank and Trust Company, Louisville, Kentucky

Appointed by Board of Governors
Sister Eileen M. Egan . . .President, Spaulding College,
Kentucky
James F. Thompson . . . .Professor of Economics, Murray
versity, Murray, Kentucky
Richard O. Donegan . .. .Senior Vice President and Group
General Electric Company,
Kentucky

Term
expires
Dec. 31
1982
1983

Louisville,
1981
State Uni1982
Executive,
Louisville,
1983

MEMPHIS BRANCH
Appointed by Federal Reserve Bank
Stallings Lipford
President, First-Citizens National Bank of
Dyersburg, Dyersburg, Tennessee
.
Bruce E. Campbell, Jr. . .Chairman of the Board and President, National Bank of Commerce, Memphis,
Tennessee
Earl L. McCarroll
President, The Farmers Bank & Trust Company, Blytheville, Arkansas
Wayne W. Pyeatt
President, Memphis Fire Insurance Company, Memphis, Tennessee
Appointed by Board of Governors
Benjamin P. Pierce
President, Tyrone Hydraulics, Inc., Corinth,
Mississippi
Patricia W. Shaw
Executive Vice President, Universal Life
Insurance Company, Memphis, Tennessee
Donald B. Weis
President, Tamak Transportation Corporation, West Memphis, Arkansas

1981
1981
1982
1983

1981
1982
1983

District 9—MINNEAPOLIS
Class A
Zane G. Murfitt

President, Flint Creek Valley Bank, Philipsburg, Montana
Henry N. Ness
Senior Vice President, The Fargo National
Bank, Fargo, North Dakota
Vern A. Marquardt ....President, Commercial National Bank of
L'Anse, L'Anse, Michigan
Class B
Russell G. Cleary




Chairman and President, G. Heileman
Brewing Company, LaCrosse, Wisconsin

1981
1982
1983

1981

Directories and Meetings

Joe F. Kirby
Harold F. Zigmund

Chairman, Western Surety Company, Sioux
Falls, South Dakota
President and Chief Executive Officer,
Blandin Paper Company, Grand Rapids,
Minnesota

277
Term
expires
Dec. 31
1982
1983

Class C
William G. Phillips

Chairman and Chief Executive Officer,
International Multifoods, Minneapolis,
Minnesota
Sister Generose Gervais .Administrator, St. Mary's Hospital, Rochester, Minnesota
Stephen F. Keating
Midwest Plaza Building, Minneapolis,
Minnesota

1981
1982
1983

HELENA BRANCH
Appointed by Federal Reserve Bank
Lynn D. Grobel
President, First National Bank of Glasgow,
Glasgow, Montana
Jase O. Norsworthy
President, The N.R.G. Company, Billings,
Montana
Harry W. Newlon
President, First National Bank, Bozeman,
Montana
Appointed by Board of Governors
Norris E. Hanford
Fort Benton, Montana
Ernest B. Corrick
Vice President and General Manager,
Timberlands-Rocky Mountain Operation,
Champion International Corporation, Missoula, Montana

1981
1982
1982
1981

1982

District 10—KANSAS CITY
Class A
John D. Woods
Howard K. Loomis
Wayne D. Angell
Class B
Alan R. Sleeper
Charles C. Gates

Chairman and Chief Executive Officer, The
Omaha National Bank, Omaha, Nebraska
President, The Peoples Bank, Pratt, Kansas
President, Council Grove National Bank,
Ottawa, Kansas

Alden, Kansas
Chairman of the Board and President, Gates
Rubber Company, Denver, Colorado .. .
James G. Harlow, Jr. . . .President and Chief Executive Officer, Oklahoma Gas and Electric Company, Oklahoma City, Oklahoma




1981
1982
1983
1981
1982
1983

278

Directories and Meetings

Class C
Doris M. Drury
Paul H. Henson
John F. Anderson

Term
expires
Dec. 31
Professor of Economics and Director of
Public Affairs Program, University of
Denver, Englewood, Colorado
Chairman, United Telecommunications, Inc.,
Kansas City, Missouri
President and Chief Executive Officer, Farmland Industries, Inc., Kansas City, Missouri

1981
1982
1983

DENVER BRANCH
Appointed by Federal Reserve Bank
Kenneth C. Naramore . . .President, Stockmen's Bank & Trust Company, Gillette, Wyoming
Delano E. Scott
Chairman of the Board and President, The
Routt County National Bank of Steamboat Springs, Steamboat Springs, Colorado
George S. Jenks
Chairman and Chief Executive Officer,
Albuquerque National Bank, Albuquerque, New Mexico
Appointed by Board of Governors
Caleb B. Hurtt
President and Corporate Vice President,
Denver Division, Martin Marietta Aerospace Corporation, Denver, Colorado . .
Alvin F. Grospiron
Denver, Colorado

1981
1982
1982

1981
1982

OKLAHOMA CITY BRANCH
Appointed by Federal Reserve Bank
J.A. Maurer
Chairman, Security National Bank and Trust
Company, Duncan, Oklahoma
Marcus R. Tower
Vice Chairman of the Board and Chairman
of the Credit Policy Committee, Bank of
Oklahoma, Tulsa, Oklahoma
W.L. Stephenson, Jr
Chairman and Chief Executive Officer, Central National Bank and Trust Company,
Enid, Oklahoma
Appointed by Board of Governors
Christine H. Anthony . . .Oklahoma City, Oklahoma
Samuel R. Noble
Chairman of the Board, Noble Affiliates,
Inc., Ardmore, Oklahoma

1981
1982
1982
1981
1982

OMAHA BRANCH
Appointed by Federal Reserve Bank
W.W. Cook, Jr
President, Beatrice National Bank and Trust
Company, Beatrice, Nebraska



1981

Directories and Meetings

Joe J. Huckfeldt
Donald J. Murphy

President, Gering National Bank and Trust
Company, Gering, Nebraska
Chairman and Chief Executive Officer,
United States National Bank of Omaha,
Omaha, Nebraska

Appointed by Board of Governors
Gretchen S. Pullen
Chairman of the Board, Swanson Enterprises, Inc., Omaha, Nebraska
Robert G. Lueder
President, Lueder Construction Company,
Omaha, Nebraska

279
Term
expires
Dec. 31
1981
1982

1981
1982

District 1 1 — DALLAS
Class A
Lewis H. Bond
John P. Gilliam
Miles D. Wilson

Class B
J. Wayland Bennett
Robert D. Rogers
Kent Gilbreath
Class C
Gerald D. Hines
Margaret S. Wilson
John V. James

Chairman of the Board and Chief Executive
Officer, Texas American Bancshares Inc.,
Ft. Worth, Texas
President and Chief Executive Officer, First
National Bank in Valley Mills, Valley
Mills, Texas
Chairman of the Board and President, The
First National Bank of Bellville, Bellville,
Texas
Associate Dean for Industry Relations,
Texas Tech University, Lubbock, Texas .
President, Texas Industries, Inc., Dallas,
Texas
Associate Dean, Hankamer School of Business, Baylor University, Waco, Texas . ..
Owner, Gerald D. Hines Interests, Houston,
Texas
Chairman of the Board and Chief Executive
Officer, Scarbroughs Stores, Austin, Texas
Chairman of the Board, Dresser Industries,
Inc., Dallas, Texas

1981
1982
1983

1981
1982
1983

1981
1982
1983

EL PASO BRANCH
Appointed by Federal Reserve Bank
Arnold B. Peinado, Jr. . .Executive Vice President, AVC Development Corporation, El Paso, Texas
Ernest M. Schur
Chairman of the Executive Committee, The
First National Bank of Odessa, Odessa,
Texas



1981
1981

280

Directories and Meetings

Stanley J. Jarmiolowski . .Chairman of the Board and President, First
International Bank in El Paso, El Paso,
Texas
Claude E. Leyendecker . .President, Mimbres Valley Bank, Deming,
New Mexico
Appointed by Board of Governors
Josefina A. Salas-Porras . .Executive Director, BI Language Services,
El Paso, Texas
A.J. Losee
Shareholder, Losee, Carson, & Dickerson
Professional Association, Artesia, New
Mexico
Chester J. Kesey
CJ. Kesey Enterprises, Pecos, Texas

Term
expires
Dec. 31
1982
1983

1981
1982
1983

HOUSTON BRANCH
Appointed by Federal Reserve Bank
John T. Cater
President, Bank of the Southwest National
Association, Houston, Texas
Ralph E. David
President, First Freeport National Bank,
Freeport, Texas
Will E. Wilson
Chairman of the Board and Chief Executive Officer, First Security Bank of Beaumont, N.A., Beaumont, Texas
Raymond L. Britton . . . . Labor Arbitrator, and Professor of Law,
University of Houston, Houston, Texas .
Appointed by Board of Governors
George V. Smith, Sr
President, Smith Pipe & Supply, Inc., Houston, Texas
Jerome L. Howard
Chairman of the Board and Chief Executive
Officer, Mortgage & Trust, Inc., Houston,
Texas
Paul N. Ho well
Chairman of the Board and President,
Howell Corporation, Houston, Texas . . .

1981
1981
1982
1983

1981
1982
1983

SAN ANTONIO BRANCH
Appointed by Federal Reserve Bank
John H. Holcomb
Owner-Manager, Progreso Haciendas Company, Progreso, Texas
Charles E. Cheever, Jr. . .President, Broadway National Bank, San
Antonio, Texas
George Brannies
Chairman of the Board and President, The
Mason National Bank, Mason, Texas . .
John H. Garner
President and Chief Executive Officer,
Corpus Christi National Bank, Corpus
Christi, Texas



1981
1981
1982
1983

Directories and Meetings

Appointed by Board of Governors
Carlos A. Zuniga
Partner, Zuniga Storage and Forwarding
Company, Laredo, Texas
Pat Legan
Owner, Legan Properties, San Antonio,
Texas
Lawrence L. Crum
Professor of Banking and Finance, The
University of Texas at Austin, Austin,
Texas

281
Term
expires
Dec. 31
1981
1982
1983

District 12—SAN FRANCISCO
Class A
Robert A. Young

Chairman and President, Northwest National Bank, Vancouver, Washington . .
Frederick G. Larkin, Jr. .Chairman of the Executive Committee,
Security Pacific National Bank, Los Angeles, California
Ole R. Mettler
Chairman and President, Farmers & Merchants Bank of Central California, Lodi,
California
Class B
Malcolm T. Stamper . . . . President, The Boeing Company, Seattle,
Washington
Clair L. Peck, Jr
Chairman of the Board, C.L. Peck Contractor, Los Angeles, California
J.R. Vaughan
Senior Member, Richards, Watson, Dreyfuss
& Gershon, Los Angeles, California . . .

1981
1982
1983

1981
1982
1983

Class C
Alan C. Furth

President, Southern Pacific Company, San
Francisco, California
Caroline L. Ahmanson . .Chairman of the Board, Caroline Leonetti,
Ltd., Beverly Hills, California
Cornell C. Maier
Chairman, President, and Chief Executive
Officer, Kaiser Aluminum and Chemical
Corp., Oakland, California

1981
1982
1983

LOS ANGELES BRANCH
Appointed by Federal Reserve Bank
Harvey J. Mitchell
Executive Vice President and Division Manager, The Mitsubishi Bank of California,
Escondido, California
Bram Goldsmith
Chairman of the Board, City National Bank,
Beverly Hills, California
Fred W. Andrew
President and Chief Operating Officer,
Superior Farming Company, Bakersfield,
California
James D. McMahon . .. .President, Santa Clarita National Bank,
Valencia, California



1981
1982
1982
1983

282

Directories and Meetings

Appointed by Board of Governors
Harvey A. Proctor
Chairman of the Board, Southern California
Gas Company, Los Angeles, California .
Togo W. Tanaka
President, Gramercy Enterprises, Los Angeles, California
Lola M. McAlpin-Grant .Assistant Dean, Loyola Law School, Los
Angeles, California

Term
expires
Dec. 31
1981
1982
1983

PORTLAND BRANCH
Appointed by Federal Reserve Bank
Jack W. Gustavel
President and Chief Executive Officer, The
First National Bank of North Idaho,
Coeur d'Alene, Idaho
Robert F. Wallace
Chairman of the Board and President, First
Interstate Bank of Oregon, N.A., Portland, Oregon
Herman C. Bradley, Jr. . . President and Chief Executive Officer, TriCounty Banking Company, Junction City,
Oregon
William S. Naito
Vice President, Norcrest China Company,
Portland, Oregon
Appointed by Board of Governors
Jean Mater
Vice President, Mater Engineering, Ltd.,
Corvallis, Oregon
Phillip W. Schneider . . . . Former Northwest Regional Executive,
National Wildlife Federation, Portland,
Oregon
John C. Hampton
Chairman and President, Willamina Lumber
Company, Portland, Oregon

1981
1981
1982
1983

1981
1982
1983

SALT LAKE CITY BRANCH
Appointed by Federal Reserve Bank
Spencer F. Eccles
President and Chief Operating Officer, First
Security Corporation, Salt Lake City,
Utah
David P. Gardner
President, University of Utah, Salt Lake
City, Utah
Fred H. Stringham
President, Valley Bank and Trust Company,
South Salt Lake, Utah
Albert C. Gianoli
Chairman of the Board and President, First
National Bank of Ely, Ely, Nevada
Appointed by Board of Governors
Wendell J. Ashton
Publisher, Deseret News, Salt Lake City,
Utah
Robert A. Erkins
Geothermal Agri/Aquaculturist, White Arrow Ranch, Bliss, Idaho
J.L. Terteling
President, The Terteling Company, Inc.,
Boise, Idaho



1981
1981
1982
1983

1981
1982
1983

Directories and Meetings

SEATTLE BRANCH
Appointed by Federal Reserve Bank
Douglas S. Gamble
President and Chief Executive Officer, Pacific Gamble Robinson Company, Seattle,
Washington
CM. Berry
President, Seattle-First National Bank, Seattle, Washington
Donald L. Mellish
Chairman of the Board, National Bank of
Alaska, Anchorage, Alaska
Lonnie G. Bailey
Executive Vice President, Farmers & Merchants Bank of Rockford, Spokane,
Washington
Appointed by Board of Governors
George H. Weyerhaeuser .President and Chief Executive Officer,
Weyerhaeuser Company, Tacoma, Washington
Merle D. Adlum
President, Maritime Trades Department,
AFL-CIO, Puget Sound District Council,
Seattle, Washington
Virginia L. Parks
Vice President for Finance and Treasurer,
Seattle University, Seattle, Washington . .




283
Term
expires
Dec. 31

1981
1981
1982
1983

1981
1982
1983

284

Directories and Meetings

Presidents and Vice Presidents
December 31,1981

Federal
Reserve
Bank

President
First Vice President

Vice Presidents

or Branch
Boston

..

Frank E. Morris
Daniel Aquilinox
James A. Mclntosh T.F.HunUr. 1
Richard A. Walker1
F.K. Cummings
James W. Grieb
Luther M. Hoyle, Jr.
Robert J. Listfield
Stephen K. McNees
D.A. Pelletier
Laurence H. Stone
Richard F. Syron
Thomas Vangell

R.W. Eisenmengerx
Niels O. Larsenx
T.E. Cimeno, Jr.
Norman S. Fieleke
Joan L. Gulley
Kenneth H. Kulesza
W.N. McDonough
Alicia H. Munnell
Richard E. Randall
Walter T. Sullivan
Roy H. Turnquist
Herbert F. Wass

Anthony M. Solomon Sam Y. Cross1
Peter Fousekx
T.M. Timlen, Jr.
Ronald B. Gray J x
P.B. Henderson, Jr.1 *
Thomas C. Sloane
Peter D.Sternlight
James O. Aston
Peter Bakstansky
Suzanne Cutler
Ralph A. Cann III
Henry S. Fujarski
Chester B. Feldberg
Margaret Greene
Roberta J. Green
Roger M. Kubarych
Whitney R. Irwin
A.M. Puckett
Edwin R. Powers
Irwin D. Sandberg
Geri M. Riegger
Israel Sendrovic
F.C. Schadrack, Jr.
Robert C. Thoman
Neal M. Soss
Richard Vollkommer H.W. Whiteman, Jr.
H. David Willey
John T. Keane
Buffalo
1
Philadelphia Edward G. Boehne
K.G.Adack
John D. Johnsonx
Richard L. Smoot
Thomas K. Desch
Peter M. DiPlacido
Guy H. Edwards
Ronald G. Foley
James F. Gaylord
Hiliary H. Holloway
A.A. Kudelich
Donald J. McAneny
Donald J. Mullineaux L.C. Murdoch, Jr.
William H. Stone, Jr. Ronald D. Watson
New York

Cleveland

Willis J. Winn
W.H. MacDonald

Cincinnati
Pittsburgh
Richmond

W.H.Hendricks 1
John M. Davis, Jr. x
George E. Booth, Jr.
Lee S. Adams
Randolph G. Coleman Harry W. Huning
T.E. Orminston, Jr.
John W. Kopnick
Donald G. Vincel
Lester M. Selby
Robert F. Ware
Robert E. Showalter * Charles A. Cerino
Donald C. Benjamin

WelfordS. Farmer 1
Robert P. Black
1
Jimmie R. Monhollon John F. Rand
L.W. Bostian, Jr.
Timothy Q. Cook
Roy L. Fauber
R.B. Hollinger, Jr.


http://fraser.stlouisfed.org/ page of listing.
For notes see last
Federal Reserve Bank of St. Louis

James Parthemosx x
Joseph F. Viverette
J.A. Broaddus, Jr.
George B. Evans
William C. Glover
Richard L. Hopkins

Directories and Meetings

285

Presidents and Vice Presidents—Continued
Federal
Reserve
Bank

President
First Vice President

Vice Presidents

or Branch
Richmond—

Cont.
Baltimore . .
Charlotte2 . .
Culpeper . .
Atlanta

Birmingham
Jacksonville.
Miami
Nashville . .
New Orleans
Chicago . . .

Detroit . .
St. Louis .

Little Rock .

William D. Martin III A.V. Myers, Jr.
CD. Porter, Jr.
Joseph C. Ramage
Aubrey N. Snellings
Andrew L. Tilton
James F. Tucker
R.D. McTeer, Jr. x
William E. Pascoe III
Gerald L. Wilson
Stuart P. Fishburnex Boyd Z. Eubanks
John G. Stoides
A.D. Tinkelenberg
William F. Ford
Harry Brandt*
George C. Guynn1
Robert P. Forrestal Billy H.Hargett 1
Arthur H. Kantner1
Donald L.Koch 1
Brown R. Rawlingsx
W.R. Caldwell
William N. Cox III
W.M. Davis
Delmar Harrison
Robert E. Heck
John R. Kerr
William G. Pfaff
H. Terry Smith
John M. Wallace
Edward Willingham
Hiram J. Honea
Charles D. East
F.J. Craven, Jr.
Jeffrey J. Wells
James D. Hawkins
Silas Keehn
Brian Carey1
Charles W. Furbee1
Daniel M. Doyle
Robert M. Fitzgerald* James R. Morrisonx
1
KarlA.Scheld1
Harry S.Schultz1 1
Ruby L. Sloan
Carl E. Vander Wilt
Richard P. Anstee
Wayne R. Baxter
Gary L. Benjamin
Paul J. Bettini
Harris C. Buell, Jr.
George W. Cloos
George E. Coe
Franklin D. Dreyer
William H. Gram
Oliver I. Ireland
Daniel P. Kinsella
Joseph G. Kvasnicka
Robert A. Ludwig
Larry R. Mote
William T. Newport
Dorothy M. Nichols
Louis J. Purol
William Rooney
Harvey Rosenblum
R.M. Scheider
David R. Starin
Adolph J. Stojetz
Ruth F. Vilona
Eugene J. Wagner
Laurence Washtien
Patricia W. Wishart
Robert W. Wellhausen Allen G. Wolkey
William C.Conrad 1
Frederick S. Dominick
1
AnatolB. Balbach
Joseph P. Garbarini1
Lawrence K. Roos
Bradley G. Glass1
F. G. Russell, Jr.1
Donald W.
Moriarty, Jr.
Harold E.Uthoff1
Ruth A. Bryant
Albert E. Burger, Jr. Charles R. Halbrook
James R. Kennedy
Martha L. Perine
William J. Sneed
Warren G. Snover
Robert W. Thomas
Delmer Weisz
John F. Breen

DigitizedFor FRASER last page of listing.
for notes see


286

Directories and Meetings

Presidents and Vice Presidents—Continued
Federal
Reserve
Bank
or Branch
Louisville
Memphis

President
First Vice President

Minneapolis E. Gerald Corrigan
Thomas E. Gainor

Helena

....

Vice Presidents
Donald L. Henry *
Robert E. Matthews
Melvin L. Bursteinx
L.W. Fernelius1
Sheldon L. Azine
Phil C. Gerber
Douglas R. Hellweg
Howard L. Knous
Clarence W. Nelson
James R. Taylor
Betty J .

John P. Danforthx
Gary P. Hansonx
Lester G. Gable
Bruce J. Hedblom
Ronald E. Kaatz
David R. MacDonald
Arthur J. Rolnick
R.W. Worcester
Lindstrom

W.T.Billington1
James R. Bell1
Kansas City. Roger Guffey
x
Henry R. Czerwinski James R. Bowen
Thomas E. Davisx
James A. Cacy
Cecil B. Foley
Carl M. Gambs
Thomas M. Hoenig
G.H. Miller, Jr.
M. L. Mothersead
Richard K. Rasdall
Barry K. Robinson
Philip E. Schmidt
Robert E. Scott
Jerry D. Shreeves
Donald A. Slover
DickH . Woods, Jr.
x
Denver . . . .
Wayne W. Martin
James F. O'Meara
Oklahoma
Citv
Omaha . . . .

William G. Evans
Robert D- Hamilton x

G.C. Cochranlll 1
Robert H. Boykin
Joseph E. Burns1
1
William H. Wallace Jay K. Mast 1
Harry E. Robinsonx
Neil B.Ryan
Tony J. Salvaggiox
Jack A. Clymer
Anthony J. Montelaro
C.J. Pickering
Larry J. Reck
Sammy T. Schulze
Robert Smith III
M.E. Sweatt, Jr.
E.W. Vorlop, Jr.
El Paso
Joel L. Knnnce Jr.
J.Z- Rowe
Houston
San Antonio
Thomas H. Robertson

Dallas

San Francisco . . John J. Balles
John B. Williams




John J. Carsonx
Kenneth A. Grant 1
1
R.T.Griffith
Michael W.Keran 1
Donald V. Masten1
Robert M.McGill 1 1
Kent O.Sims 1
Eugene A. Thomas
Joseph R. Bisignano
William M. Burke
Oren L. Christenson
David Christerson
Robert C. Dietz
H. Peter Franzel
George P. Galloway
John W. Gleason
Harry W. Green
Warren H. Hutchins
Henry B. Jamison
Rix Maurer, Jr.
Michael J. Murray
Louis E. Reilly
W. Gordon Smith
Wilhelmine Von Turk
Thomas Warren

Directories and Meetings

287

Presidents and Vice Presidents-—Continued
Federal
Reserve
Bank

or Branch

President
First Vice President

Los Angeles.
Portland ,
Salt Lake
City .
Seattle ..

Vice Presidents
Richard C. Dunn x
Hector M. Martin
Richard L. Rasmussen
Angelo S. Carella
A. Grant Holman
Gerald G.Kelly 1

1. Indicates Senior Vice Presidents.
2. Culpeper Center is not considered a branch.

Conference of f residents
The presidents of the Federal Reserve
Banks are organized into a Conference
of Presidents that meets periodically to
consider matters of common interest and
to consult and advise the Board of Governors. At a meeting held September 16, 1980, J. Roger Guffey, President
of the Federal Reserve Bank of Kansas
City, was elected Chairman, and Lawrence K. Roos, President of the Federal
Reserve Bank of St. Louis, was elected
Vice Chairman for 1981. Richard K.
Rasdall, Jr., of the Federal Reserve
Bank of Kansas City was appointed
Secretary, and Lynn A. David of the
Federal Reserve Bank of St. Louis was
appointed Assistant Secretary.




Conference of
First Vice Presidents
The Conference of First Vice Presidents
of the Federal Reserve Banks was
organized in 1969 to meet periodically
for the consideration of operational and
other matters. On September 24, 1980,
Henry R. Czerwinski, First Vice President of the Federal Reserve Bank of
Kansas City, was elected Chairman, and
Donald W. Moriarty, Jr., First Vice
President of the Federal Reserve Bank
of St. Louis, was elected Vice Chairman
of the conference for 1981. Richard K.
Rasdall, Jr., and Lynn A. David were
appointed Secretary and Assistant Secretary respectively.

Index




291

Index
Acceptances, bankers {See Bankers

acceptances)
Assets and liabilities
Banks, by class, 241
Board of Governors, 206
Federal Reserve Banks, 212-17
Balance of payments, review of 1981,

23-27
Bank holding companies
Board policy statements and other
actions, 68, 69, 74-76, 182-84,
190, 192-93
Control of, changes, 186-87
Examination, inspection, and
regulation, 180-86
International banking operations,
70, 187
Legislation recommended, 161-62,
163
Litigation, 165-68
Number and assets, 180
Regulation Y, 73-74, 197
Stock repurchases, 191
Supervision manual, 183
Bank Holding Company Act, 162, 164,
184, 185, 188
Bank mergers and consolidations, 186,
189, 248-66
Bank Secrecy Act, 190
Bankers acceptances
Authority to purchase and enter into
repurchase agreements, 84-85
Federal Reserve Banks
Earnings, 203, 224
Holdings, 203,212, 214, 216
Ineligible, amendment of
Regulation K, 70
Open market transactions, 222
Repurchase agreements, 212, 214,
216, 222
Banking offices, changes in number, 246
Banking supervision and regulation by
Federal Reserve System
In 1981, 180-93
Legislation recommended, 161-64




Banking supervision and regulation—
Continued
Policy statements and other actions,
68,69,74-76,182-84,190,
192-93
Regulations {See Regulations)
Regulatory improvement project, 192,
193, 194-98
Board of Governors {See also Federal
Reserve System)
Annual Reports to Congress, 148-60
Consumer Advisory Council, 151,
155, 264
Delegated authority, 185, 189, 191
Educational activities, 148
Financial statements, 205-10
Interpretations, 67, 70, 72, 73, 195
Legislation recommended, 161-64
Litigation, 165-74
Members and officers, 260
Policy actions and statements, 65-83,
182-84, 190, 192-93
Publications {See Publications)
Regulations {See Regulations)
Regulatory improvement project,
192, 193, 194-98
Salaries, 207
Training {See Training)
Branch banks
Changes in number, 247
Federal Reserve
Bank premises, 203, 232
Directors, 265-83
Vice presidents in charge, 284-86
Foreign, of U.S. banking organizations, 67-68, 70, 178, 181, 187
Foreign banks, 68, 181
Capital accounts

Banks, by class, 241
Federal Reserve Banks, 213, 215, 217
Capital adequacy guidelines, 76, 182,
183, 190
Capital and surplus, 71
Cash Discount Act, 175

292

Index

Clearing and collection (See Transfers
of funds)
Commercial banks
Assets and liabilities, 241
Banking offices, changes in number,
246
Number, by class, 241
Supervision and regulation by
Federal Reserve System, 180-93
Transfers of funds (See Transfers of
funds)
Condition statement of Federal Reserve
Banks, 212-17
Consurner Advisory Council, 151,155,
264
Consumer and community affairs
Annual Reports to Congress, 147-60
Board actions, review, 148-60
Consumer Advisory Council, 151,
155, 264
Educational activities, 148
Consumer leasing, 71, 196
Credit (See also Loans)
Equal Credit Opportunity (See
Equal Credit Opportunity)
Farm, legislation, 177
Stocks, 73, 191-93, 197
Truth in Lending (See Truth in
Lending)
Debt ceiling, legislation, 175
Defense production loans, 177, 203
Depository institutions
Interest on deposits, 67
Legislation recommended, 161
Reserve requirements, 65-68, 194,
235
Depository Institutions Deregulation
and Monetary Control Act of 1980,
66, 67, 70, 72, 183
Depository Institutions Deregulation
Committee, 72
Deposits
Banks, by class, 241
Federal Reserve Banks, 213, 215,
217, 243, 245
Interest rates (See Interest on
deposits)
Reserve requirements (See Reserve
requirements)
Directors, Federal Reserve Banks and
branches, 163, 265-83



Discount rates at Federal Reserve Banks
(See Interest rates)
Discounts and advances (See Federal
Reserve Banks)
Dividends, Federal Reserve Banks, 202
226,229,231
Earnings of Federal Reserve Banks (See
Income of Federal Reserve Banks)
Economic Recovery Tax Act of 1981,
176
Economy in 1981,4-11
Educational activities, 148, 149, 185
Electronic fund transfers (See Transfers
of funds)
Equal Credit Opportunity
Annual Report to Congress, 153-56
Enforcement, 75
Examinations and inspections
Bank holding companies, 180-85
Federal Reserve Banks, 201
Foreign operations of U.S. banking
organizations, 181
Improvements, 182
Schools, 185
Specialized, 181
State member banks, 180-85
Expenses
Board of Governors, 205-10
Federal Reserve Banks, 202, 224,
228, 230
Fair Housing Act, enforcement, 75
Farm credit, legislation, 177
Federal Advisory Council, 263
Federal agency securities
Authority to purchase and enter
into repurchase agreements,
84-86, 121, 139
Federal Reserve Bank holdings and
earnings, 203, 212, 214, 216,
220
Federal Reserve open market
transactions, 222
Repurchase agreements, 212, 214,
216,220,222,242,244
Federal Deposit Insurance Act, 162
Federal Financial Institutions Examination Council, 75, 182, 183, 185,
193

Federal Open Market Committee
Audit of System Open Market
Account, 201
Continuing authorizations, review,
105
Meetings, 84, 262
Members and officers, 262
Policy actions, 84-146
Federal Reserve Act, 162, 163, 184, 191
Federal Reserve Agents, 265
Federal Reserve Banks
Assessments for expenses of Board of
Governors, 207, 226, 228, 230
Bank premises, 203, 212, 214, 216,
232
Branches (See Branch banks)
Capital accounts, 213, 215, 217
Chairmen and deputy chairmen, 265
Condition statement, 212-17
Delegated authority, 185, 189, 191
Directors, 163, 265-83
Discount rates (See Interest rates)
Discounts and advances, 212, 214,
216,224,242,244
Dividends, 202, 226, 229, 231
Educational activities, 148
Examination or audit, 201
Income and expenses, 202, 224, 228,
230
Interest rates, 235
Officers and employees, number and
salaries, 234
Operations, volume and cost, 233,
234
Payments mechanism, development
(See Transfers of funds)
Presidents and vice presidents,
284-87
Pricing of services, 199-201
Profit and loss, 226
Securities and loans, holdings and
earnings, 203
U.S. government securities (See U.S.
government securities)
Federal Reserve notes
Condition statement data, 212-17
Cost of printing, issue, and
redemption, 207
Interest paid to U.S. Treasury, 202,
226,229,231
Federal Reserve Reform Act of 1977,
163



Index

293

Federal Reserve System (See also Board
of Governors)
Banking supervision and regulation
by, 180-93
Consumer affairs (See Consumer and
community affairs)
Foreign currency operations (See
Foreign currencies)
Map of Federal Reserve Districts, 257
Membership, 193
Payments mechanism, development
(See Transfers of funds)
Pricing of services, 199-201
Training (See Training)
Federal Trade Commission Act, 157-60
Financial Institutions Regulatory and
Interest Rate Control Act of 1978,
162, 193
Financial Institutions Supervisory Act,
184
Financial markets and monetary policy,
12-22
Foreign banks, 67, 68, 163, 180, 187,
188
Foreign currencies
Authorization and directive for
operations, 84, 87-89, 106, 107
Federal Reserve earnings, 224
Review, 105
Gold certificate accounts of Reserve
Banks and gold stock, 212, 214,

215,216,217,242,244
Gold Commission, 177
Home mortgage disclosure, 65, 156,
195
Income of Federal Reserve Banks, 202,

224, 228, 230
Individual retirement accounts (See
Retirement accounts)
Insured commercial banks
Assets and liabilities, 241
Banking offices, changes in number,
246
Interest on deposits (See also Interest
rates)
Maximum rates payable on time and
savings deposits, table, 238
Regulation Q, 67-68, 72, 195

294

Index

Interest rates (See also Interest on
deposits)
Federal Reserve Banks
Changes, 76-83
Table on rates, 235
Interlocking relationships, 178, 198
International banking facilities, 67,
68, 178, 187
International banking operations, 70,
187
International Banking Act, 163, 188
International developments, review,
23-27
International Investment Survey Act of
1976, 175
Interpretations, 67, 70, 72, 73, 195
Investments
Banks, by class, 241
Federal Reserve Banks, 212, 214, 216
Foreign, by U.S. banking
organizations, 177, 188
Keogh plans (See Retirement plans)
Labor market developments, 9

Leasing, consumer, 71, 196
Legislation
Enacted, 175-79
Recommended, 161-64
Litigation
Bank holding companies, 165-68
Board procedures and regulations,
challenges, 168-74
Loans (See also Credit)
Affiliates of member banks, legislation
recommended, 163
Banks, by class, 241
Defense production, 177, 203
Executive officers of member banks
and other insiders, 162, 191
Federal Reserve Banks
Discounts and advances, 212, 214,
216, 224, 242, 244
Holdings and earnings, 203, 224
Interest rates, 235
Volume, 212, 214, 216, 233,
242, 244
Mortgages, legislation, 65, 156, 195



Margin requirements

Securities credit, 73, 192
Table, 240
Member banks (See also National
banks)
Affiliates, legislation recommended,
163
Assets, liabilities, and capital
accounts, 241
Banking offices, changes in number,
246
Branches (See Branch banks)
Borrowings from Federal Reserve
Banks (See Loans)
International banking operations, 70
Number, 241
Reserve requirements (See Reserve
requirements)
Reserves and related items, 242-45
State member banks (See State
member banks)
Transfers of funds (See Transfers of
funds)
Mergers and consolidations, 185, 186,
189-90,248-56
Monetary Control Act (See Depository
Institutions Deregulation and
Monetary Control Act of 1980)
Monetary policy
Financial markets relative to, 12-22
Reports to Congress, 28-61
Review of 1981, 3-11
Money market mutual funds, 161
Mortgage loans, 65, 156, 195
Mutual savings banks, 246
National banks (See also Member
banks)
Assets and liabilities, 241
Banking offices, changes in number,
246
Capital adequacy guidelines, 76, 182,
183, 190
Legislation, 175
Number, 241
Negotiable order of withdrawal (NOW)
accounts, 72, 195
Nonmember depository institutions
Assets and liabilities, 241

Index
Nonmember depository institutions—
Continued
Banking offices, changes in number,
246
Number, 241
Reserve requirements, 66, 194
Transfers of funds, 69
Options, amendment of Regulation T,

73, 193
Payments mechanism, development (See

Transfers of funds)
Policy actions
Board of Governors
Discount rates at Federal Reserve
Banks, 76-83
Regulations (See Regulations)
Statements and other actions,
74-76, 182-84, 190, 192-93
Federal Open Market Committee
Authority to effect transactions in
System Open Market Account
Domestic operations, 84-87, 90,
98, 108, 113, 121, 128,
134, 139, 140, 146
Foreign currency operations, 84,
87-89, 106, 107
Review, 105
Presidents and vice presidents of
Federal Reserve Banks
Conferences of Presidents and of
First Vice Presidents, 287
List, 284-86
Salaries of presidents, 234
Prices, 10
Pricing of System services, 199-201
Profit and loss, Federal Reserve Banks,
226
Publications
Bank Holding Company Supervision
Manual, 183
Federal Reserve Regulatory Service,
198
Real estate, 65, 156, 195
Regulations (See also Regulatory
improvement project)
B, Equal Credit Opportunity, 198
C, Home Mortgage Disclosure, 65,195



295

Regulations—Continued
D, Reserve Requirements of
Depository Institutions, 65-68,
183, 194
E, Electronic Fund Transfers, 69,
197, 198
F, Securities of Member State
Banks, 69, 190
J, Collection of Checks and Other
Items and Wire Transfers of
Funds, 69
K, International Banking Operations,
70-71
L, Management Official Interlocks,
198
M, Consumer Leasing, 71, 196
P, Minimum Security Devices and
Procedure for Federal Reserve
Banks and State Member Banks,
193, 198
Q, Interest on Deposits, 67-68, 72,
195
Securities credit transactions
(Regulations G, T, U, X),
73, 191-93, 197
Y, Bank Holding Companies and
Change in Bank Control,
73-74, 197
Z, Truth in Lending, 71, 196,
198
Regulatory improvement project, 192,
193,194-98
Repurchase agreements
Authority to purchase and to enter
into, 84-86
Bankers acceptances, 84-85, 212,
214,216,222
Federal agency securities, 84-86,
212,214,216,220,222
U.S. government securities, 84-86,
212,214,216,220,222,242,
244
Reserve requirements
Depository institutions, 65-68, 194,
235
Foreign banks, 67, 68, 164, 187
Legislation recommended, 161, 164
Member banks
Changes, 65-68
Table, 235

296

Index

Reserves, member banks
Reserve requirements (See Reserve
requirements)
Reserves and related items, 242-45
Retirement accounts, 65-66, 72, 176
Salaries

Board of Governors, 207
Federal Reserve Banks, 234
Schools (See Training)
Securities (See also specific types)
Credit transactions, 73, 191-93, 197
State member banks, 69, 182, 190
Social security legislation, 178
Special drawing rights, 212, 214, 216,
242, 244
State member banks (See also Member
banks)
Applications by, 191
Assets and liabilities, 241
Banking offices, changes in number,
246
Board policy statements and other
actions, 68, 69, 74-76, 182-84,
190, 192-93
Control of, changes, 186-87
Examination, 180-85
Executive officers and other insiders,
loans to, 162, 191
Financial disclosures, 190
Foreign activities, 219, 220, 225
Mergers and consolidations, 185, 186,
189-90, 248-56
Number, 180,241
Securities, 69, 182, 190
Stock market credit, 73, 191-93, 197
Supervision and regulation (See Banking
supervision and regulation by
Federal Reserve System)
System Open Market Account
Audit, 201
Authority to effect transactions
Domestic operations, 84-87, 90,
98, 108, 113, 121, 128, 134,
139, 140, 146
Foreign currency operations, 84,
87-89, 106, 107
Review, 105




Tax incentives, 176
Thrift institutions, 161-62, 238
Training, 148, 149, 185
Transfers of funds
Check collection, 69
Electronic fund transfers, 69, 197,
198
Federal Reserve operations, volume
and cost, 233, 234
Negotiable order of withdrawal
(NOW) accounts, 72, 195
Payments mechanism, development,
201
Truth in Lending
Act
Annual Report to Congress,
148-53
Legislation, 175
Regulation Z, 71, 196,198
U.S. balance of payments, review,

23-27
U.S. government securities
Authority to buy, to enter into
repurchase agreements, and to
lend, 84-86, 121, 139
Bank holdings, by class of bank, 241
Federal Reserve Banks
Authority to buy directly from U.S.
Treasury, 85
Earnings, 202, 203, 224
Holdings, 203, 212, 214, 216, 218,
242, 244
Open market transactions, 222
Repurchase agreements, 212, 214,
216, 220, 222, 242, 244
Special certificates purchased directly
from U.S. Treasury, 221
V loans, 177, 203

FRB 1-12,000-0482 C

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