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Foreword The year just past has been m e m o r a b le fo r th e American people. The Bicentennial was, all in all, a good year. It was a year of fresh insights and rediscovery. It was a year during which Americans had the opportunity—and the motivation—to reflect upon the roots of their society, to consider their past. And in thinking about their origins, Americans were provided with some new perspectives on where they might and ought to be going. In particular—and quite naturally so—the in stitutional framework of the American system of government was in the spotlight during 1976. Americans looked at their governmental system and were reminded how unique it is—not only in its peculiar institutional arrangements but in its relative longevity as the cornerstone of a democratic soci ety. They retraced that system to its origins and found them in the philosophies and hopes and even in the fears and suspicions of the founding fathers. They discovered that even though the nation’s cir cumstances have changed dramatically in the past 200 years, the aspirations of the nation’s people have remained surprisingly constant. And the American people found in the end that the underlying framework of their public institutions still serves them rather well, even if the performance of those in stitutions can be found wanting from time to time. It is in this same spirit that we at the Federal Reserve Bank of Chicago have taken the opportuni ty provided by our 1976 Annual Report to reflect momentarily on the structure of one of our public institutions—the Federal Reserve System—before turning to the Chicago Fed’s performance, as one component of that structure, during the past year. Our primary aim is not really to describe the rather unusual structure of the nation’s central banking system, but rather to place that structure in a perspective that makes it somewhat more un derstandable. And even more importantly, it is hoped that by putting the Fed’s structure in the con text of the past, some focus can be provided for current discussion of whether that structure can continue to meet the nation’s needs for the future. \976 Afy/y, ^ F R A L R E S *** The Fed in perspective: 1776-1976 The Chicago Fed in review: 1976 Statement of condition Statement of earnings Directors Officers The Fed in perspective: 1776-1976 The Federal Reserve System—two hun dred years old? Obviously not. It was “ born'' in this century; only some sixty-odd years have passed since President Woodrow Wilson signed the Federal Reserve Act. Nevertheless, the Fed of 1914—the year it was established— and, indeed, the Fed of today is as much a reflection of the philosophies expressed in the structuring of the American republic as it is a creature of early twentieth-century American experience. Without viewing the Fed in such a perspective, one that transcends its own lifespan, it is almost impossible to make sense of its many unusual—indeed unique— characteristics: the fact that although the Fed is the U.S. central bank, its structure is basical ly decentralized; the fact that although it is a public institution, with a public purpose, the Federal Reserve Banks which carry out this purpose are strikingly private in form; the fact that although all Fed operations are aimed at serving the public as a whole, direct dealings with the public at large are limited compared to interactions with firms within the private sector; and finally, the fact that although the Fed is without doubt a governmental agency, its operations are largely independent from the government. These truly unusual features in the Federal Reserve’s structure cannot be ex plained solely by the economic circumstances at the time of the Fed’s establishment. In fact, even the whole of U.S. history, including the rise and fall of the country’s two previous cen tral banks, cannot adequately explain the Fed’s “ split personality.” (See Box.) To truly make sense out of this unique central bank, one must look beyond American historical events—one must look to the uniquely American ideas and philsophies that shaped the nation’s history. The “ key” to the Fed’s structure. . . In his Farewell Address, George Washington warned of “ ...that love of power, and proneness to abuse it, which pre dominates in the human heart.” Hewenton, The necessity of reciprocal checks in the exercise of political power; by dividing and distributing it into different depositories, and constituting each the Guardian of the Public Weal against in vasions by the others, has been evinced by experiments ancient and modern;— some of them in our country and under our own eyes. To preserve them must be as necessary as to institute them. These sentiments are fundamental to our system of government. While the founding fathers most certainly displayed abundant op timism in launching the “ great American ex periment” and in creating institutions to fulfill their hopes for the future, it was their abiding pessimism that government power could “ forge the fetters for freedom” that deter mined their approach to those institutions. In the eyes of the founding fathers, only a fine line separated the exercise of power and the abuse of power. To avoid creating con centrations of power, to assure that this line would not be crossed, they created a governmental structure with built-in limits on power—a system of “ checks and balances.” Not only was the latitude of each branch of the federal government to exercise power sharply restricted by the powers granted to the others, the power granted to the national government as a whole was circumscribed. It was a federal rather than a central govern ment that was established, a government that could exercise only those powers specifically 1 The "split personality” of the Fed The Federal Reserve is a central bank but it is d ecen tralized: Instead of a single central bank, there are 12 regional Reserve Banks. The operations of each, while coordinated through the System's Board of Governors, are to a significant degree autonomous from those of the others. Moreover, the Fed's relationship to the commercial banking system is strangely dichotomous for a central monetary authority since it is individual commercial banks that exercise the option of membership in the Federal Reserve. Perhaps most interestingly, authority for each of the central bank’s primary policy tools (reserve re quirements, discount rates, open market operations) is vested in a different component within the System. The Fed is a public institution with a public purpose, but many of its characteristics are m ore typical of a private organization: Like any public institution the Fed can be reduced to a singular purpose: promoting the well being of the nation’s people. Specifically, the Fed pursues economic stability and growth, high employment and stable prices, both domestic and international, through its power to in fluence the flow of money and credit in the nation's economy. But while its substance is wholly public, the Fed’s form is strikingly private. Reserve Banks have corporate charters, private “ stockholders,” and directors representing the "stockholders” who elect them. And while the Fed operates for the purpose of serving the public at large, many of its operations represent service to a particular industry (commercial banking) within the private sector and even parallel services offered by firms within the private sector. enumerated, with any other powers remain ing the preserve of the various states. Striking parallels to the concerns raised by Washington can be found in thoughts ex pressed at the time plans for the nation’s third central bank, ultimately the Federal Reserve System, were being discussed: We must devise a plan, suited to the democratic genius of our government, which will save us from a dominating, powerful, centralized monetary in stitution.1 1J. Laurence Laughlin, The Federal Reserve Act, Its Origins and Problems (New York: Macmillian Co., 1933) p. 389. Speech delivered in Chicago on May 24,1911 by j.L. Laughlin, Professor of Political Economy at the University of Chicago and Chairman of the Executive Committee of the National Citizens’ League for the Promotion of a Sound Banking System. 2New York Times, 18 January 1911, p. 5. Statement (in reference to the Aldrich plan) of Paul M. Warburg, 2 The plan gives to the future central organ sufficient powers to render it ef ficient but at the same time restricts the functions of the central organ so that no possible danger of abuse in dealing with individual concerns or of interfering with the business of the existing banks, need be apprehended.2 It seems to me that he has avoided the prejudice felt against a central bank, w hile safeguarding the proposed reserve association from becoming a political football.3 partner in the New York banking firm of Kuhn, Loeb and Company. In 1914 Mr. Warburg was appointed to the first Federal Reserve Board. 3Chicago Daily Tribune, 18 January 1911, p. 6. State ment (in reference to the Aldrich plan) of George M. Reynolds, President, Continental and Commercial National Bank, Chicago. From 1914 Mr. Reynolds served almost 20 years on the Board of Directors of the Federal Reserve Bank of Chicago. The Fed is a com ponent of the governm ental structure, but in large part it operates in dependently of the governm ent: Like any other government agency, the Fed is the creation of a legislative act, and just as Con gress established it, Congress could modify or even abolish the Fed as it sees fit. Like officials of other government agencies, the members of the Federal Reserve’s Board of Governors are ap pointed by the President with the advice and consent of the Senate, and report to Congress periodically on the performance of the agency they administer. But despite these clear ties to government, the Fed's degree of independence from government—especially on a day-to-day basis—is almost unique, not only among American government agencies, but among most central banks in the world. Underlying the Fed’s independent posture within government are the facts that: • The Fed is not subject to Congress's "power of the purse” —it operates on its own earnings rather than federal budget appropriations, and it need not seek Congress’s prior approval for its actions and programs (so long, of course, as they are consistent with the Federal Reserve Act). • The Fed, in formulating and executing national monetary policy, is institutionally separated from all other components of the federal government that exercise responsibility in the economic policy area. In particular, and in sharp contrast to many other central banks, the Fed is not an agency within the executive branch's finance ministry, i.e., our Treasury Department. • The Fed’s governmental^ appointed officials serve 14-year terms, terms longer than those of the elected officials who choose them. In addition, the power to appoint many other Fed of ficials largely resides in the private sector. The "prejudice felt against a central bank” was the natural outgrowth of the American view of man’s propensity to abuse power. The fear of a “ dominating, powerful, centralized monetary institution” was endemic given the American's suspicion of central authority of any kind. It was these fears and suspicions that were expressed by the Jeffersonians—that creating an institution which concentrated economic power in the hands of a few would be tantamount to granting it the power to d estro y individual liberties, thereby resurrecting the tyranny the revolution had overthrown. It was these fears that forestalled the establishment of a U.S. central bank until the end of the eighteenth century, and likewise sealed the demise of two U.S. central banks during the nineteenth century. And it was these fears that shaped the unique U.S. central banking system that was devised in the twentieth century. . . . C h e ck s and balances Just as the concept of a central bank posed the same paradox the American people had encountered in creating institutions to govern them—that the power to promote the public good could also be used to contravene it—the same device, a system of checks and balances, was employed to resolve the paradox. These checks, or safeguards against the abusive use of central bank power, provide the Fed with its own paradoxical but uniquely American features. On the one hand, the perceived need to place checks on the power and influence of the central bank itself dictated the Fed's uniquely decentralized design. Reserve Bank autonomy and the distribution of authority for monetary policy implementation between distinct components of the Fed parallel the distribution of counterbalancing powers between the various branches of the federal 3 government. And comparable to con stitutional provisions which insured that the federal government's power would be less than absolute—preserving powers to the various states—voluntary membership restricted the central bank’s control over the commercial banking system—preserving the dual banking system or the authority of state governments to charter and regulate banks. On the other hand, various features of the Fed’s structure have to be regarded as designed to limit the ability of those outside the institution from using the central bank to promote their own self-interest, i.e., to serve narrow economic or political purposes. Similar to the constitution of the federal government, the device employed to isolate the Fed from any single interest group was to subject it to a plurality of interests. Control over the Fed is diffused between the branches of the federal government and between the public and private sectors. The regional struc ture, the mechanisms for selection of officials, and the institutional separation of monetary and fiscal policy serve to insulate Fed policy from particular partisan or economic pressures; these features encourage its responsiveness to a diversity of influences— both geographic and sectoral. With only very few exceptions the Fed’s distinguishing characteristics are unchanged from 1914. Indeed, of the few modifications to the Fed’s original structure, probably the most notable—the removal of two govern ment officials from the Federal Reserve Board after 1935—further strengthened one of the Fed’s unique features. But the absence of major structural change is hardly sufficient evidence that Americans have discovered the ideal in stitutional framework for a central bank. Without doubt, Americans today are as firm as their predecessors in their distaste for con centrations of power. But the true test for the American people of the viability of any public institution must be whether the structure of the institution enhances its capacity to promote the public good as well as lessens its potential to harm it. If the Fed’s structure is found at any future time to be inconsistent with the needs, goals and aspirations of the American people, it will likely be changed. The Chicago Fed in review: 1976 In a sense, the major activities of a Reserve Bank today, like the structural characteristics of the Federal Reserve System, generally correspond to those outlined in the original Federal Reserve Act. Establishing a nationwide payments system by collecting checks deposited by banks, providing curren cy consistent with the needs of commerce by issuing Federal Reserve notes, providing li quidity to the banking system by discounting commercial paper, serving as the fiscal agent of the U.S. Government, supervising various commercial bank activities, and stabilizing financial markets through discount rate ad justments and the purchase and sale of securities—all these activities were discussed 4 in the first annual report issued by the Chicago Fed for 1915. Obviously, however, much has tran spired during the past 60years. The nation has e xp e rien ced fantastic industrial and economic growth and has benefited from continuous technological progress. Financial institutions have become increasingly sophisticated, and regional markets have given way to truly national financial markets. And demands on public institutions to play a more active role in promoting the economic well-being of the American people have in tensified. Each and all of these factors had and will continue to have a significant impact on Chicago Fed operations. Payments mechanism operations N um ber of items D o llar am ount 1975 1976 C h ecks co llected : C o m m ercial bank checks U .S. governm ent checks* Noncash items collected . . Transfers o f fu n d s ................... 798.8 42.2 1.4 6.007.7 billion billion billion hillion 714.4 41.9 1.3 4 948 6 billion billion billion hillinn 1976 1975 1.8 billion 1.6 billion 104.2 m illion 120.0 m illion .5 m illio n ** 1.1 m illion ^ A m illin n 9 ft m i l l i o n ‘ Includ es postal m oney orders. “ Basis for counting items changed from 1975. "O n November 16, 1914, the date this bank opened for business, it installed a collec tion system...” The Chicago Fed's first annual report went on to say, "The development of the check-collecting function has proved the most difficult problem confronting the management of the bank.” A dramatic change has taken place in the magnitude and scope of Chicago Fed payments activities since 1915, reflecting the nation's economic growth and technological progress through the ensuing years. Perhaps unchanged, however, despite the fact that a "less-check” society no longer need be regarded in futuristic terms, is that check collection remains the Chicago Fed’s most ex pensive function, and in a sense, as it was in 1915, its most difficult function. Since the five offices of the Chicago Fed—Chicago, Detroit, Des Moines, Indianapolis, and Milwaukee— consistently process more checks than in any other Federal Reserve District, increasing ef ficiency is a constant challenge. “ Operations improvements” and productivity analyses have become the focal point of Chicago Fed check collection activities in order to ease and speed a continuously increasing work load. One result has been the implementation of new computer programs at all five offices dur ing 1976. But while the check remains a viable and much used payments instrument, certainly most discussed in the payments mechanism area today are the various developments which substitute electronic fund transfers for check payments. The Federal Reserve’s systemwide communications network has for a number of years provided a facility for effecting paperless payments. The Chicago Fed currently processes more than $6 trillion in funds transfers annually through this system, a dollar total which greatly exceeds its check volume, and during 1976, the Detroit Branch for the first time passed the $1 trillion mark in funds transferred. Current efforts to expand and improve this system are aimed primarily at linking additional member banks "on-line” or computer-to-computer with the network. During 1976 six additional banks served by the Chicago head office and seven banks in the Detroit Branch territory were linked to the network for a total of 27 district banks, and the Detroit Branch was linked directly to Chicago. As a result, the volume of paperless transfers that could be processed instantaneously was greatly increased. Chicago Fed participation in other elec tronic payments projects was also notable during 1976. Automated clearing houses (ACHs), which exchange electronic-based payment information such as direct deposit payrolls, have been organized with Chicago Fed cooperation in all five office cities. All are operational except the ACH in Milwaukee, and its implementation is imminent. Finally, and probably most significant in terms of the number of current check payments eliminated by electronic transfers in the Seventh District, have been devel opments in the area of federal government recurring payments programs. The five Chicago Fed offices, the Treasury Depart ment, and the district’s financial institutions cooperated to automate Seventh District Social Security direct deposits during 1976— removing over half a million payments each 5 Statement of condition (In thousands of dollars) As of December 31 1975 1976 Assets C o ld certificate a c c o u n t .................................................. Interdistrict settlem ent a c c o u n t.................................. Special draw ing rights certificate acco unt . . . . Federal R eserve notes o f other b a n k s ................... O th e r c a s h .................................................................................. Loans: Secured by U .S. G o vern m en t s e c u r it ie s ........... O t h e r ............................................................................................ $ 1,704,081 570,496 190,000 76,709 36,278 Total lo an s............................................................................... Federal agency obligations, bought o u trig h t. . U .S. G o ve rn m en t s e c u r it ie s .......................................... $ Total loans and s e c u r it ie s ............................................. Cash items in process o f c o lle c t io n ........................ Bank p re m is e s .......................................................................... O th e r a s s e ts ............................................................................... $16,030,574 1,182,956 15,715 238,751 $14,022,937 1,460,522 15,651 206,022 Total assets ............................................................................... $20,045,560 $17,977,159 $ 1,767,736 324,257 79,000 71,867 29,167 7,020 — 7,020 1,087,925 14,935,629 46,000 — $ 46,000 914,637 1 3,062,300 Liabilities Federal R eserve n o t e s ........................................................ Deposits: M em b er bank r e s e rv e s .................................................. U .S. Treasury— general a cco u n t................................ Fo re ig n .......................................................................................... O t h e r ............................................................................................ $13,972,631 $12,464,478 3,713,914 824,742 36,062 222,489 3,744,954 493,323 40,440 58,306 Total d e p o sits....................................................................... D eferred availability cash ite m s................................... O th e r lia b ilit ie s ....................................................................... $ 4,797,207 837,098 142,708 $ 4,337,023 739,575 152,375 Total liabilities ....................................................................... $19,749,644 $17,693,451 Capital accounts Capital paid i n .......................................................................... S u rp lu s ............................................................................................ Total liabilities and capital accounts ..................... 6 $ 147,958 147,958 $20,045,560 $ 141,854 141,854 $17,977,159 The financial enterprises—balance s income—are statistical future capacity to g provide a basis for evt contrast, Federal Resei under an earningsobje earnings are incident; formed. Changes in tl and income items refl economy and actions t System monetary obj mainly of interest on System’s portfolio of Tr this is returned to the and statutory dividenc paid. Through purchase member banks, the Re base for expansion in accord with the econc ditions to member ba result from this proces currency or used to sup at commercial banks. Last year almost £ Reserve Bank credit wa of currency (Federal R< in response to public < mercial bank deposit member bank reserves of lower reserve req deposits between bant differing reserve requi System monetary p ed at providing reserv sufficient to finance < pansion, resulted in a bank’s share of secur Open Market Accoun earned on this larger pi tor accounting for the over 1975. It more than market interest rates, banks, reductions in t creased expenses. Re: less this bank’s share o actions losses entailed operations, produced Treasury. tements of private ets and statements of ficators of current and grate earnings. They iting performance. By Banks do not operate ^although substantial to the functions perr major asset, liability developments in the fertaken in support of ives. Income consists s bank’s share of the ;ury securities. Most of easury after expenses o member banks are securities and loans to rve Banks increase the rency and deposits in y’s growth needs. Adreserve deposits that re either withdrawn as rt the public's deposits of the net increase in bsorbed by the payout rve notes outstanding) nands. Although comose slightly last year, dined, mainly because ements and shifts of nd d e p o s it cla sse s w ith nents. cy actions in 1976, aimto the banking system itinued economic ex billion increase in this ?s held in the System he increase in interest folio was the major facrrease in 1976 earnings fset the effects of lower wer loans to member discount rate, and inting current earnings, >reign exchange trans currency stabilization ecord payment to the Statement of earnings (In thousands o f dollars) Year ending December 31 1975 1976 C u rre n t earnings: Advances and d is c o u n ts .................................................................. U .S. G o vern m en t s e c u r it ie s ................................................. Foreign c u r r e n c ie s ............................................................................... A ll o t h e r ....................................................................................................... Total curren t e a rn in g s .................................................................... $ 639 1,006,357 4,320 252 $ 1,588 927,614 842 255 $1,011,567 $930,299 $ 78,053 6,009 6,365 $ 71,844 4,112 6,168 T o t a l.............................................................................................................. Less reim bursem ent for certain fiscal agency and o ther e x p e n s e s .......................................... $ 90,427 $ 81,124 7,291 6,919 C u rre n t net e xp e n se s......................................................................... $ 83,136 74,205 C u rre n t net e a r n in g s .......................................................................... $ 928,431 $856,094 Additions to cu rren t net earnings: Profit on sales of U .S. G o vern m en t securities (net) . . All o t h e r ...................................................................................................... $ 5,111 214 $ 5,828 317 Total a d d itio n s....................................................................................... $ 5,325 $ 6,145 D eductions from cu rren t net earnings: Loss on foreign exchange transactions ( n e t ) .................. A ll o t h e r ...................................................................................................... $ 3,836 §2 $ 3,897 C u rre n t expenses: O perating e x p e n s e s ............................................................................ Federal Reserve c u r r e n c y ............................................................... Assessm ent for expenses of Board o f G o vern o rs . . . . Total d e d u c tio n s .................................................................................. Net deductions from (-) or additions to current net e a rn in g s .................................................................. Net earnings before paym ents to U.S. T re a s u ry .................................................................................... 1/429 $ 929,860 D ividends p a id ......................................................................................... Payments to U .S. Treasury (interest on Federal Reserve n o t e s ).................................... $ 8,661 Transferred to s u r p lu s ....................................................................... $ $ 37,236 33 $ - 31,124 $824,970 $ 915,095 6,104 37,269 8,453 812,186 $ 4,331 Surplus account Surplus, January 1 .................................................................................. Transferred to surplus— as a b o v e ............................................. $ 141,854 6,104 $137,523 4,331 Surplus, D ecem b er 3 1 ....................................................................... $ 147,958 $141,854 7 month from check-processing channels. Railroad and Civil Service retirement payments were also automated at year-end. and the automation of additional payments— such as veterans, revenue sharing, govern ment salaries—can be anticipated. Currency operations D o llar am ount 1976 C u rre n c y received and c o u n te d ........... U nfit cu rren cy w ith d ra w n ........................... C o in received and c o u n te d ..................... Food stamps received and processed. 1975 6.8 billion 1.2 billion 229.5 m illion 938.5 m illion About $4.4 million in Federal Reserve notes, the new currency created by the Federal Reserve Act, had been issued by the Chicago Fed at the end of 1915. Today, the Chicago Fed’s balance sheet indicates that almost $14 billion of its notes are outstanding, reflecting current needs for currency to ac commodate total spending in today’s economy. But the significance of the Fed’s currency activities is not the growth in the magnitude of these figures. Its real sig nificance is how easily currency and coin flows to and from the Reserve Banks—into and out of the hands of the public—as the needs of commerce dictate.The nation today has the truly “ elastic” currency that the Federal Reserve Act sought. The Fed of Chicago satisfies the currency needs in its district by supplying currency and coin in whatever volumes and denominations its member banks request—which in turn cor N um ber of items 6.5 1.2 230.0 870.3 billion billion m illion m illion 1976 890.8 m illion 271.7 m illion 1.8 billion 244.7 m illion 1975 874.9 m illion 278.7 m illion 1.7 billion 282.7 m illion respond to the demands of bank customers— and charging member banks’ reserve ac counts. Conversely, when the public’s stock of currency or coin held exceeds its needs, the excess flows back into commercial banks and ultimately to the Reserve Bank, where it is stored for reissue or withdrawn if unfit for further circulation. Currency operations at the Fed today also include the receipt—and destruction—of food stamps. On April 13,1976—Jefferson’s birthday— the $2 bill was reintroduced by the Chicago Fed and other Reserve Banks. Substantial savings in Treasury printing costs and Federal Reserve handling costs could result from broad acceptance of the bill, i.e., where twos replaced ones. But despite promotional ef forts, actual circulation of the $2 bill has not approached what had been desired. By yearend the Chicago Fed head office had issued about $61 million in $2 bills. “ Discount window” operations D o llar am ount 1976 Loans to m em ber banks 2.6 When the Chicago Fed opened, its dis count operation—providing short-term li quidity to member banks—was regarded as its paramount tool for influencing general 8 1975 billion 5.0 billion N um ber of banks accom m odated 1976 1975 114 166 money and credit conditions. Given the development of national money markets, which serve to efficiently channel funds to regions where they are most needed, other located in areas where economic activity tends to follow pronounced seasonal pat terns. Such banks—typically smaller in stitutions in rural areas—lack ready access to national credit markets. The original re quirements for qualifying for seasonal credit, however, effectively precluded participation by many of the banks meant to be served by the program. A study by the Chicago Fed of 143 “ seasonal” district banks found that cer tain restrictions excluded all but nine from qualifying for seasonal credit. As a result, seasonal borrowing program requirements were significantly liberalized during 1976. Federal Reserve activities—especially open market operations—have become more effective devices for influencing the flow of money and credit in the national economy. Nonetheless, the availability and exten sion of credit through the Reserve Bank “ discount window” still serve an important economic stabilization function, and through time Fed credit programs have been modified and expanded. Provisions for longer-term emergency credit were added in the 1930s. More recently, in 1973, the seasonal borrow ing program was implemented to aid banks, and thereby the communities they serve, “ Bank service” operations D o llar am ount 1976 Safekeeping of securities D efinitive s e c u r it ie s ..................................... Book entry s e c u ritie s .................................. Purchases and sales of securities for m em ber banks ........................................ 1975 N um ber of items 1976 1975 7.7 billion 31.6 billion 7.2 billion 21.3 billion 1.6 m illion 1.6 m illion 1.1 billion 852.7 m illion 11.6 thous. 12.7 thous. The payments, currency and lending ac tivities of the Chicago Fed emanate from specific provisions of the Federal Reserve Act. Through time, the Fed has taken the oppor tunity to expand the range of its activities which interface with member bank opera tions for the purpose of enhancing commer cial bank operating efficiency and/or System membership. Generally, these activities utilize Fed facilities and expertise developed in conjunction with statutory responsibilities or serve to encourage more efficient utiliza tion of its facilities. Examples of services provided by the Chicago Fed in this regard are: the purchase, sale and safekeeping of securities for member banks; the functional cost analysis and bank visitation programs; and various seminars and meetings with banks where Fed operations are discussed. During 1976 a new publication, the FED WIRE, was introduced to improve communication with district banks. Supervision and regulation Perhaps no single area of Federal Reserve operations has expanded so dramatically as its supervision and regulation responsibilities. Americans have increasingly demanded that the public sector take a more active role in assuring that the private sector’s performance be consistent with the public interest, and the Federal Reserve has been significantly affected by this trend. From its original activities, such as ex amining bank operations for safety and soundness and passing on applications for trust powers and membership, the Fed is to day involved in the regulation of almost every phase of commercial bank operations: from mergers, branches, holding companies, and 9 bank operations abroad to the imposition of deposit interest rate ceilings, reserve re quirements, and margin requirements for securities purchases. Particularly significant has been the recent development of Fed regulatory responsibilities in the area of con sumer credit, where Congress has generally charged the System with formulating regulations applicable to all credit vendors, not solely commercial banks: Truth-in Lending since 1969, Equal Credit Opportunity in 1975, and Home Mortgage Disclosure dur ing 1976. And these newer regulations are themselves expanding as a result of subse quent Congressional legislation, e.g., the ad dition of Fair Credit Billing (in 1975) and con sumer leasing (to take effect in 1977) toTruthin-Lending, and the expansion of Equal Credit to prohibit racial, religious and other types of discrim ination in addition to original provisions covering sex and marital status. During 1976 the Federal Reserve’s Board of Governors adopted a new regulation, AA— “ Unfair or Deceptive Acts or Practices by Banks’’—specifying formal procedures for handling consumer complaints. Complaints concerning district financial institutions are handled by the Chicago Fed’s Consumer Af fairs Division, established in 1975. The unit im plemented in May of 1976 a pilot program of separate examinations of state member banks, focusing exclusively on regulation com pliance. The unique Chicago Fed program, which is aimed at educating banks in new regulatory requirements as well as checking for institutional comformity, has drawn the interest of other federal bank regulators. Fiscal agency operations D o llar am ount 1976 M arketable go vernm ent securities issued, se rviced , red ee m ed :* D efinitive s e c u r it ie s ............................. Book entry s e c u r it ie s .......................... U .S. savings bonds issued, serviced , r e d e e m e d ............................. Fed tax receipts p ro c e s s e d ................ 19.7 589.0 N um ber of items 1975 billion billion 3.6 billion 41.4 billion 1976 43.9 billion 379.3 billion 3.6 35.7 billion billion 701.2 221.4 thous. thous. 55.6 4.4 m illion m illion 1975 1.3 m illion 204.8 thous. 53.0 6.6 m illion m illion ’ Includ es transfers of securities. The Federal Reserve Act provided that the Federal Reserve Banks could be ap pointed as the depositories and fiscal agents of the U.S. Government at the discretion of the Secretary of the Treasury. The assignment of these functions was announced on November 23,1915. Since that time Chicago Fed fiscal agent operations have grown con tinuously, reflecting the constant growth in the financial needs and requirements of its “ customer." During 1976 a number of developments significantly affected the Chicago Fed’s fiscal agency operations. The Federal ReserveTreasury Department cooperative effort to 10 encourage conversion of Treasury debt securities to “ book-entry” form took a major step forward during the year. In August the Treasury announced plans to phase out the issuance of all definitive Treasury bills.(Efforts since 1968 had already resulted in the sub stitution of computerized accounting entries for paper or definitive certificates for over 80 percent of marketable public debt). Infor mational materials on book-entry were made available in the district by the Chicago Fed, and during December all 52-week bills were for practical purposes issued in book-entry ft.rm only. Issues of definitive securities for 26-week and 13-week bills are to be eliminated in June and September 1977, respectively, and the program will un doubtedly be expanded to other marketable Treasury securities in the future. The Chicago Fed, in cooperation with the Internal Revenue Service and Seventh District banks, also implemented a major change in its procedures for processing federal tax de posits during 1976. Early in the third quarter district banks serving as fed tax depositories began sending those deposits directly to IRS service centers rather than to the Chicago Fed for intermediate processing. Because of the change, tax payments are credited to taxpayer accounts far more expeditiously, and the number of unwarranted late notices should be drastically reduced. Finally, during 1976 steps were taken to improve the public’s understanding of Treasury securities. The Chicago Fed head of fice implemented a new 24-hour telephone service providing information on current Treasury offerings and produced a new general information fact sheet. Monetary policy When the Federal Reserve System was es tablished, the discount function was regarded as its primary tool for influencing the flow of money and credit in the economy. The Act authorized the 12 regional Reserve Banks (subject to approval by the Federal Reserve Board) to change their individual discount rates. Largely to complement and support the discount function, the banks were also authorized to engage in open market operations— i.e., to purchase and sell securities for their own accounts. Later, Con gress empowered the Federal Reserve Board to change reserve requirements within specified limits. Because open market operations can be adapted continuously to changing economic and financial conditions, they have become the principal tool of monetary policy. And with financial markets now national in scope, such operations have had to be centralized: Reserve Banks no longer buy and sell securities independently. Instead, Reserve Bank presidents serve jointly with the Board of Governors on the Federal Open Market Com m ittee (FO M C), which formulates policies and guidelines for transactions in the System Open Market Account. Since 1975 annual monetary growth “ target” ranges have been made public on a quarterly basis by the FOMC. The ranges set each quarter for the year ahead reflect the FOM C’s judgment of the rate of monetary ex pansion consistent with the desired perfor mance of the economy, taking account of fac tors affecting money demand. At the end of 1975 the range projected for growth of the basic money supply (currency and demand deposits) for the year ahead was 5-71/2 per cent. During the first quarter of 1976 the lower endpoint was reduced to 41/2 percent and dur ing the second and fourth quarters the upper endpoint was reduced to 7 and 6V2 percent, respectively. The upper ends of growth ranges specified for broader measures of the money supply were also lower at the close of the year than at the start, consistent with the FOMC’s goal of allowing for sufficient monetary expansion to finance continued economic growth while resisting inflationary pressures. The System’s other monetary policy tools were also employed in the direction of easier credit during 1976. Two “ discount rate” reductions by the Chicago Fed’s board of directors were approved by the Federal Reserve Board. Effective January 19 the (basic) “ discount rate” was lowered from 6 to 5V2 percent, and effective November 22, to 5Va percent. (Reacting to the same needs, direc tors of other Reserve Banks instituted similar changes at roughly the same times.) In addi tion, actions by the Board of Governors reduced reserve requirements twice during 1976—on longer-term time deposits in Jan uary, and on demand deposits in December. 77 Directors as of December 31, 1976 Board o f Directors, Federal Reserve Bank o f Chicago, from left to right: (seated) Messrs. Strotz, Clark, Schoen hofen ; (standing) Messrs. Farver, Hackett, Spies, M ayer, DeLay, Abboud. PETER B. CLARK, Chairman Chairman o f the Board and President Evening News Association Detroit, Michigan JAY J. DeLAY President Huron Valley National Bank Ann Arbor, Michigan OSCAR G. MAYER Chairman, Executive Committee Oscar Mayer & Co. Madison, Wisconsin ROBERT H. STROTZ, Deputy Chairman President Northwestern University Evanston, Illinois PAUL V. FARVER Vice Chairman Rolscreen Company Pella, Iowa LEO H. SCHOENHOFEN Retired Chairman Marcor Inc. Chicago, Illinois A. ROBERT ABBOUD Chairman o f the Board The First National Bank Chicago, Illinois JOHN T. HACKETT Executive Vice President Cummins Engine Company, Inc. Columbus, Indiana JOHN F. SPIES President Iowa Trust and Savings Bank Emmetsburg, Iowa Federal Advisory C o u n cil M em b er A uditors (re p o rtin g to B o a rd o f D ire c to rs ) WILLIAM F. MURRAY Chairman of the Board Harris Trust and Savings Bank Chicago, Illinois FRED A. DONS, General Auditor RICHARD P. BUSH, Assistant General Auditor ROBERT A. LUDWIG, Assistant General Auditor Detroit branch JORDAN B. TATTER, Chairman President and Chief Executive Officer Southern Michigan Cold Storage Company Benton Harbor, Michigan HERBERT H. DOW Secretary The Dow Chemical Company Midland, Michigan HAROLD A. ELGAS President Gaylord State Bank Gaylord, Michigan 12 JOSEPH B. FOSTER President Ann Arbor Bank & Trust Company Ann Arbor, Michigan JOHN SAGAN Vice President-Treasurer Ford M otor Company Dearborn, Michigan CHARLES R. MONTGOMERY President Michigan Consolidated Gas Company Detroit, Michigan ROBERT M. SURDAM Chairman of the Board National Bank o f Detroit Detroit, Michigan Officers as o f D e c e m b e r 31, 1976 ROBERT P. MAYO, President DANIEL M. DOYLE, First Vice President CARL E. BIERBAUER, Senior Vice President ERICH K. KROLL, Assistant Vice President WARD J. LARSON, Senior Vice President, General Counsel, and Secretary LARRY R. MOTE, Senior Economist and Assistant Vice President JAMES R. MORRISON, Senior Vice President JAMES H. NASH, JR., Assistant Counsel KARL A. SCHELD, Senior Vice President and Director o f Research RICHARD H. RAMSDELL, Assistant Vice President HARRY S. SCHULTZ, Senior Vice President HARVEY ROSENBLUM, Senior Economist and Assistant Vice President BRUCE L. SMYTH, Senior Vice President DAVID R. STARIN, Assistant Vice President PAUL J. BETTINI, Vice President ARTHUR G. STONE, Assistant Vice President GEORGE W. CLOOS, Economic Adviser and Vice President ROBERT P. CORNELISEN, Vice President FREDERICK S. DOMINICK, Vice President FRANKLIN D. DREYER, Vice President RODERICK L. HOUSENGA, Chief Examiner HILBERT G. SWANSON, Assistant Vice President WARREN J. TAUBMAN, Assistant Vice President PATRICK J. TRACY, Assistant Chief Examiner THOMAS C. TUCKER, Assistant Vice President RUTH F. VILONA, Assistant Vice President CARL C. WELKE, Assistant Vice President JOSEPH G. KVASNICKA, Economic Adviser and Vice President ROBERT W. WELLHAUSEN, Assistant Vice President RICHARD A. MOFFATT, Vice President PATRICIA W. WISHART, Assistant Vice President and Assistant Director o f Research WILLIAM T. NEWPORT, Vice President DOROTHY M. NICHOLS, Economic Adviser and Vice President WILLIAM ROONEY, Vice President RAYMOND M. SCHEIDER, Vice President ROBY L. SLOAN, Vice President and Associate Director o f Research THOMAS L. WOLFE, Examining Officer Detroit branch WILLIAM C. CONRAD, Vice President and Manager RONALD L. ZILE, Vice President WAYNE R. BAXTER, Assistant Vice President ADOLPH J. STOJETZ, Vice President ROBERT W. COOK, Assistant Vice President EUGENE J. WAGNER, Vice President ROBERT M. FITZGERALD, Assistant Vice President ALLEN G. WOLKEY, Vice President RICHARD D. ABRAHAMSON, Assistant Vice President D es M oines office BUDDIE J. BELFORD, Assistant Vice President RUDOLPH W. DYBECK, Vice President ALAN E. BOUGHNER, Assistant Vice President THOMAS P. KILLEEN, Assistant Vice President HARRIS C. BUELL, JR., Assistant Vice President Indianapolis office WILLIAM H. GRAM, Assistant General Counsel and Assistant Secretary LOUIS J. PUROL, Vice President RICHARD L. SIMMS, JR., Assistant Vice President ROBERT JOHNSON, Assistant Vice President and Control Officer M ilw au kee office CAROL P. KASPAR, Assistant Vice President CARL E. VANDER WILT, Vice President DANIEL P. KINSELLA, Assistant Vice President RUSSELL O. LANGAN, Assistant Vice President 13
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