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1913 1973 Annual REPORT Federal Reserve Bank of Chicago To the member banks of the Seventh Federal Reserve District Progress toward achieving our national employment and production goals in 1973 was clouded by an accelerated rate of inflation. Expansion of real output was down slightly from the 1972 pace, the balance of payments moved to a surplus position for the first time since 1969, and the unemployment rate averaged lower. However, during the year, the consumer price level rose much faster than in 1972. The major aim of monetary policy in 1973 was to contain inflation by restricting the growth of money and credit to levels consistent with potential output. But there was little the System could do to relieve price pressures resulting from worldwide crop shortages, from shortages of basic materials and skilled labor, or from adjustments to relaxation of wage and price controls. Mainly because of the fuel situation, we face greater uncertainty than usual in projecting economic activity in 1974. Shortages, especially in energy, will continue to threaten our ability to expand real income and will heighten the conflict between the two major national economic goals of full employment and price stability. It will be necessary for the Federal Reserve to limit the growth in bank reserves to an amount consistent with the supply of money and credit nec• essary to maximize real output and employment without contributing to further price inflation. The cost of money and commercial banks' ability to meet the credit demands of their customers will depend on the strength of those credit demands relative to this supply constraint. This bank's financial statements for 1973 reflect continued growth in economic activity in the Seventh District, the effects of higher prices and interest rates, and the effects of policy action to restrain monetary expansion. Assets of the bank rose more than $1 billion, to $16.5 billion. Most of the increase, as usual, represented our share of U. S. Government securities purchased for the System Open Market Account, the major source of reserves to the banking system. Net earnings were $720 million, compared with $551 million in 1972. Of that, $704 million were transferred to the U. S, Treasury. Both the volume and cost of operations rose. Almost 1.5 billion checks were cleared by this bank, its branch, and its offices in 1973, up 140 million from 1972. Substantial progress was made in shifting securities in custody for member banks and their customers to book-entry form. Reflecting the generally tight supply of reserves relative to loan demand, both the volume of member bank borrowings and the number of borrowers set new records. The Federal Reserve Bank of Chicago is continuing its efforts to improve the check collection system. Both the Chicago bank and the Detroit branch expanded their overnight check clearing operations last year. The Des Moines office, opened in 1972, was fully operational throughout 1973. In addition, an Indiana office was established in Indianapolis, and plans were announced for a Wisconsin office in Milwaukee to better serve those areas of the Seventh District. Because of the major economic problems facing the nation, both the Federal Reserve and the commercial banks had to cope with many new challenges in 1973. Our directors, officers, and staff join me in thanking you for your cooperation throughout the year. Sincerely, Robert P. Mayo President December 31, 1973 Statement of earnings 1973 1972 Current earnings: Advances and discounts $ 16,287,284 U. S. G o v e r n m e n t securities $ 778,388,289 Foreign currencies 1,927,020 609,927,134 69,226 173,510 285,432 126,696 $795,030,231 $612,154,360 $ 56,380,771 $ 48,959,118 3,927,084 4,946,457 A l l other T o t a l c u r r e n t earnings Current expenses: Operating expenses Federal Reserve currency Assessment f o r expenses of Board o f Governors 6,961,600 Total 5,295,000 $ 67,269,455 $ 59,200,575 Less r e i m b u r s e m e n t f o r certain 5,315,357 4,877,671 C u r r e n t net expenses fiscal agency and other expenses $ 61,954,098 $ 54,322,904 C u r r e n t net earnings $733,076,133 $557,831,456 $ $ Additions to current net earnings: P r o f i t o n sales o f U. S. G o v e r n m e n t securities (net) — A l l other 166.034 Total additions 485,247 406,647 $ 166,034 $ $ 5,659,178 $ 891,894 Deductions f r o m current net earnings: Loss on sales o f U. S. G o v e r n m e n t securities (net) Loss o n foreign exchange transactions (net) — 7,444,395 A l l other 7,723,360 50,712 Total deductions $ 13,154,285 $ 7,723,360 Net d e d u c t i o n s f r o m (—) or a d d i t i o n s t o c u r r e n t net earnings -12,988,251 -6,831,466 $720,087,882 $550,999,990 $ $ Net earnings before payments t o U. S. Treasury Dividends paid 7,729,090 7,126,102 Payments t o U. S. Treasury (interest o n Federal Reserve notes) 704,086,842 Transferred t o surplus $ 530,384,188 8.271,950 $ 13,489,700 $124,150,150 $110,660,450 Surplus account Surplus, January 1 8.271.950 Surplus, December 31 13.489,700 $132.422,100 Transferred t o surplus—as above $124,150,150 Statement of condition December 31. 1973 December 3 1 . 1972 $ 1,595,272,313 $ 1,846,174,385 Assets G o l d c e r t i f i c a t e account Special d r a w i n g rights certificate account 70,000,000 70,000,000 Federal Reserve notes of other banks 68,620,400 101,525,750 Other cash 32,514,805 40,085,433 Loans: Secured by U. S. G o v e r n m e n t securities 37,560,000 T o t a l loans $ Federal agency obligations, b o u g h t o u t r i g h t U. S. G o v e r n m e n t securities T o t a l loans and securities 164.000.000 195,905,000 $ 262,285,000 315,617,000 210,976,000 12,780,765,000 11,230.999,000 $13,292,287,000 $11,704,260,000 1,288,752,664 1,459,407,392 Cash items in process of c o l l e c t i o n Bank premises 16,215,278 16,418,543 133,062.673 154,570.510 $16.496,725.133 $15.392.442.013 $10,926,364,364 $10,064,341,663 3,516,514,296 3,516,467,665 207,841,508 189,771,416 40,820,000 43,210,000 Other assets Total assets 98,285,000 158,345,000 Other Liabilities Federal Reserve notes Deposits: Member bank reserves U. S. Treasurer— general account Foreign Other 437,937,122 50,715.222 $ 4,203,112,926 $ 3,800,164,303 Deferred availability cash items 952,058,072 1,192,451,152 Other liabilities 150,345.571 37,184,595 $16.231,880,933 $18.104.22.1683 $ $ T o t a l deposits Total liabilities Capital accounts Capital paid in Surplus Total liabilities and capital accounts C o n t i n g e n t l i a b i l i t y on acceptances purchased f o r foreign correspondents 132,422,100 124,150,150 132.422,100 124.150.150 $16.496,725.133 $15,392,442,013 $ $ 91.232,700 26,671,000. Regulatory changes A number of 1973 amendments to Federal Reserve regulations were related to System efforts to control inflation. Changes in reserve requirements for member banks (Regulation D) reduced the banks' expansion potential and increased the cost of credit expansion, especially to the large banks. Modification of interest rate ceilings (Regulation Q) increased costs for banks that raised the interest rates they paid. At the same time, these changes allowed commercial bank deposits to remain reasonably competitive with market instruments for both business funds and personal savings, thus lessening the problem of disintermediation. Increases in the "discount rate" to a record71/2percent by the end of August reflected a more restrictive monetary policy and the need to limit the gap between the cost of reserves in the money market and their cost at the discount window as market interest rates rose. In a move unrelated to monetary policy, Regulation A (Extensions of Credit by Federal Reserve Banks) was amended to implement a "seasonal borrowing privilege." I n t e r e s t rate ceilings On May 16, the Board of Governors (in coordination with other federal agencies regulating banks) announced the suspension of Regulation Q interest rate ceilings on certificates of deposit in denominations of $100,000 or more (CDs) maturing in 90 days or longer. CDs with shorter maturities had been free from ceilings since mid-1970. As market interest rates rose above the ceilings on the longer-dated CDs, only very short-dated CDs could be sold. Suspension of the remaining ceilings permitted a more balanced maturity structure and helped avoid a repetition of the severe deposit outflows that had occurred in 1966 and 1969. Regulation Q ceilings applicable to time deposits other than CDs were increased effective July 1. The maximum rate on bank passbook accounts was raised from41/2to 5 percent. Ceilings on time deposits of less than $100,000 were raised by1/4t o3/4percentage points on various maturity categories and ceilings were suspended for deposits of at least $1,000 with maturities of at least four years. Subsequently, banks were instructed to limit ceiling-free obligations to 5 percent of each bank's total time and savings deposits. Effective November 1, following a legislative directive that required the reimposition of ceilings on deposits of less than $100,000, a71/4percent maximum was set for the four-year deposit, and limitations on outstandings were removed. Effective July 5, withdrawal of a time deposit before maturity is permitted only at a reduced rate of interest. Later amendments required disclosure with respect to the withdrawal penalties both when the depositor enters the contract and in the advertising of offering rates. Reserve requirements Concurrent with the suspension of CD ceilings, the Board increased reserve requirements on CDs and commercial paper sold by bank holding companies for bank use—to the extent these liabilities exceeded the average amount outstanding in the week ending May 16 or $10 million, whichever was greater—from 5 percent to 8 percent. The 20 percent requirement against Eurodollars above a reserve-free base, which had effectively prohibited any increase above base, was reduced to 8 percent but with this requirement to be applied gradually to the base amount until none will be reserve-free by March 1974. Late in June, finance bills (ineligible acceptances) were defined as deposits for purposes of reserve requirements. These obligations (of 30 days or longer) were included with CDs and commercial paper subject to the 8 percent requirement. The "marginal" requirement was raised another 3 percent, to a total of 11 percent on the specified liabilities above base, beginning October 4. This final increase was revoked in early December. In July, reserve requirements on net demand deposits above $2 million were increased by1/2percentage point. All except the smallest member banks were affected. In a November amendment to Regulation D, gross demand deposits were defined to include a bank's obligation to pay a check after the customer's deposit account has been debited but before the bank has made payment. This required the banks to maintain reserves against available funds no longer recorded as deposits. S e a s o n a l b o r r o w i n g privilege Effective April 19, Regulation A was amended to provide a formal channel through which qualifying member banks can obtain credit from the Federal Reserve to cover significant drains of funds through deposit outflows and/or bulges in loans that occur seasonally. The purpose of this borrowing privilege is to enable smaller banks to be more responsive to the overall credit needs of their communities by permitting them to arrange in advance to borrow from the Reserve banks to meet predictable peak needs. To be eligible, a bank must lack reliable access to national money markets and must meet specified criteria with respect to the size and duration of the seasonal need. Statement of operations Dollar amount 1973 Loans t o m e m b e r banks Currency c o u n t e d 1973 $6.6 billion 1972 363* 168* 6.1 b i l l i o n 5.6 b i l l i o n 741.3 million 175.0 m i l l i o n Coin c o u n t e d Checks c o l l e c t e d : $30.1 billion N u m b e r o f items 1972 165.0 m i l l i o n 1.4 b i l l i o n 642.3 billion 557.1 b i l l i o n 1.4 b i l l i o n 1.2 b i l l i o n 29.2 billion 25.7 b i l l i o n 99.5 million 98.0 million 1.4 b i l l i o n 1.6 b i l l i o n 1.6 m i l l i o n 1.7 m i l l i o n 752.5 million 1.3 billion 1 C o m m e r c i a l bank checks U. S. G o v e r n m e n t checks 2 Noncash c o l l e c t i o n items Transfers of funds 3,783.2 billion 2,930.9 billion 1.9 m i l l i o n 1.5 m i l l i o n U. S. savings bonds issued, exchanged, redeemed 3.5 b i l l i o n 3.3 b i l l i o n 56.0 million 51.6 m i l l i o n Other g o v e r n m e n t securities issued, exchanged, redeemed 247.7 billion 136.8 b i l l i o n 1.7 m i l l i o n 1.6 m i l l i o n Securities held in safekeeping F o o d stamps processed 14.8 b i l l i o n 12.3 b i l l i o n 1.6 m i l l i o n 1.6 m i l l i o n 491.0 million 448.0 million 264.6 million 261.6 million * N u m b e r of banks a c c o m m o d a t e d . 1 Totals include t h e Chicago b a n k , the D e t r o i t b r a n c h , and the Des Moines and Indianapolis offices. 2 Includes postal m o n e y orders. Directors Federal Reserve Bank of Chicago as of December 31, 1973 W I L L I A M H. F R A N K L I N J O H N W. B A I R D P E T E R B. C L A R K Chairman and Chief Executive O f f i c e r Caterpillar T r a c t o r C o m p a n y , Peoria, Illinois [Chairman] President Baird & Warner, Inc., Chicago, Illinois Chairman of t h e Board and President Evening News Association, D e t r o i t , Michigan [Deputy JOHN T. HACKETT Chairman] Executive Vice President C u m m i n s Engine C o m p a n y , Inc., C o l u m b u s , Indiana M E L V I N C. L O C K A R D OSCAR G . M A Y E R H O W A R D M. P A C K A R D President First National Bank, M a t t o o n , Illinois Chairman, Executive C o m m i t t e e Oscar Mayer & Co., Madison, Wisconsin Vice Chairman EDWARD BYRON SMITH S. C. Johnson & Son, Inc., Racine, Wisconsin Chairman of t h e Board F L O Y D F. W H I T M O R E T h e N o r t h e r n Trust C o m p a n y , Chicago, Illinois President The O k e y - V e r n o n National Bank o f Corning, Corning, Iowa Member of Federal Advisory Council A L L E N P. S T U L T S FRED A. DONS F R E D E R I C K S. D O M I N I C K Chairman o f t h e Board A m e r i c a n National Bank and Trust C o m p a n y of Chicago, Chicago, Illinois General A u d i t o r Assistant General A u d i t o r Officers R O B E R T P. M A Y O ERNEST T. B A U G H M A N C A R L E. B I E R B A U E R W A R D J. L A R S O N J A M E S R. M O R R I S O N KARL A. SCHELD President First Vice President Senior Vice President Senior Vice President, General Counsel, and Secretary Senior Vice President Senior Vice President and D i r e c t o r o f Research H A R R Y S. S C H U L T Z Senior Vice President B R U C E L. S M Y T H Senior Vice President GEORGE W. CLOOS Vice President and Economist LE R O Y A . D A V I S Vice President EDWARD A. HEATH Vice President RICHARD A. M O F F A T T Vice President R A Y M O N D M. S C H E I D E R Vice President R O B Y L. S L O A N Vice President JACK P. T H O M P S O N Vice President A L L E N G. W O L K E Y Vice President A R N O L D J. A N S C H U T Z Assistant Vice President B U D D I E J. B E L F O R D Assistant Vice President P A U L J. B E T T I N I Assistant Vice President H A R R I S C. B U E L L , J R . R I C H A R D P. BUSH C H A R L E S L. C A R T E R Assistant Vice President Assistant General A u d i t o r Examining Officer R O B E R T P. C O R N E L I S E N Assistant Vice President F R A N K L I N D. D R E Y E R Assistant Vice President W I L L I A M H. G R A M R O D E R I C K L. H O U S E N G A ROBERT JOHNSON Assistant General Counsel and Assistant Secretary Chief Examiner Assistant Vice President and C o n t r o l O f f i c e r D A N I E L P. K I N S E L L A Assistant Vice President E R I C H K. K R O L L Assistant Vice President JOSEPH G. K V A S N I C K A Assistant Vice President and E c o n o m i s t C A R O L P. L a B A R B E R A Assistant Vice President W I L L I A M T. NEWPORT Assistant Vice President D O R O T H Y M. N I C H O L S R I C H A R D H. R A M S D E L L WILLIAM Assistant Vice President and E c o n o m i s t Assistant Vice President ROONEY Assistant Vice President C H A R L O T T E H. S C O T T Assistant Vice President R O B E R T E. S O R G Assistant Vice President D A V I D R. S T A R I N Assistant Vice President A D O L P H J. S T O J E T Z Assistant Vice President A R T H U R G. S T O N E Assistant Vice President H I L B E R T G. S W A N S O N Assistant Vice President T H O M A S C. T U C K E R Assistant Vice President BRUCE A. T U R K S T R A Assistant Vice President E U G E N E J. W A G N E R Assistant Vice President C A R L C. W E L K E Assistant Vice President ROBERT W. W E L L H A U S E N P A T R I C I A W. W I S H A R T T H O M A S L. W O L F E Assistant Vice President Assistant Vice President Examining Officer Des Moines office R U D O L P H W. D Y B E C K T H O M A S P. K I L L E E N Vice President Assistant Vice President Indianapolis office L O U I S J. P U R O L R I C H A R D L. S I M M S , J R . Vice President Assistant Vice President 1913 1973 A b o u t t h e cover The Federal Reserve System was created when Public Law Number 43 was passed by the 63rd Congress, and approved by President Woodrow Wilson on December 23, 1913. The facsimile of the first page of the bill, reproduced on the cover of this report, commemorates the 60th anniversary of the System. The facade of this bank, also pictured, represents the strong foundations on which the System rests. Since its inception, the Federal Reserve System has been charged with formulating national monetary policy. Its dedication to the task, and its balanced approach to the needs of business, government, and the public in setting policy, have earned the System worldwide respect. The men and women who have built and maintained the integrity of the Federal Reserve System since 1913—and continue to do so today—include the Board of Governors and their employees in Washington, D. C., the Board of Directors of each Reserve bank, and the officers and employees at the twelve Reserve banks. Aware of the past, involved in the present, the System looks to the future with confidence. Directors Detroit branch as of December 31, 1973 W I L L I A M M. DEFOE H A R O L D A. ELGAS Chairman of the Board Defoe S h i p b u i l d i n g C o m p a n y , Bay C i t y , Michigan [ C h a i r m a n ] President G a y l o r d State Bank, G a y l o r d , Michigan JOSEPH B. F O S T E R President A n n A r b o r Bank, A n n A r b o r , Michigan TOM KILLEFER Vice President—Finance and General Counsel Chrysler C o r p o r a t i o n , D e t r o i t , Michigan E L L I S B. M E R R Y Director National Bank o f D e t r o i t , D e t r o i t , Michigan R O L A N D A. MEWHORT L. W I L L I A M S E I D M A N D i r e c t o r and Consultant Manufacturers National Bank o f D e t r o i t , D e t r o i t , Michigan General Partner Seidman & Seidman, C.P.A., Grand Rapids, Michigan Officers W I L L I A M C. C O N R A D R O N A L D L. Z I L E Vice President & Manager Vice President R O B E R T W. COOK Assistant Vice President ROBERT M. F I T Z G E R A L D Assistant Vice President P H I L I P G. N E H R O Assistant Vice President FEDERAL RESERVE BANK OF CHICAGO Box 834 Chicago, Illinois 60690 FIRST CLASS