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Federal Reserve Bank of Chicago

1978 Annual Report

Cover:
Enclosed within the pediment of the Corinthian temple front of
the Federal Reserve Bank of Chicago is the seal of the bank. The
building, erected in the early 1920s, has an exquisitely detailed
design inspired by classical architecture. It is delicately decorated
with dirt-streaked, highly stylized
mouldings—running
horizontally along the bottom and repeated below the top element
is a leaf and dart. Tucked under the block-like dentils of the raking
cornice is an egg and dart. Atop the crown of the pediment is a great
acroterium of acanthus leaves and tendrils.
Photo and description

courtesy of Carroll William Westfall.

Federal Reserve Bank of Chicaqo

1978 Annual Report
Table of contents
A message from the Presidentthe year in review

4

1976 financial statements

7- 9

Summary of operations

11

Executive changes

12

Officers

13

Directors

14

A

message from the President -

the year in review
As I look back on 1978,1 see it as a year in which many milestones were
reached, with few ultimate resolutions. Clearly, the year was marked by
several events of major significance for the Federal Reserve, the banking
and financial system, and the American economy generally. But in spite of
these developments, some of the most difficult questions being raised as
the year began remained unanswered at its close.
On the economic
policy front, significant actions were taken by the
Federal Reserve, and by
the Administration as well,
to deal with the interrelated problems of inflation and international
weakness in the dollar.
Fortunately, by year-end,
there also was some
evidence that our efforts
to slow monetary growth
were finally bearing fruit.

4

Even more importantly, I sensed that monetary
policy would no longer be
left to wage the battle
against inflation alone.
While opinion was hardly
unanimous,
there
appeared to be broadening agreement that resolution of our economic problems was possible only if both the public and
private sectors exercised more restraint. As the year progressed, growing
numbers of public officials were recognizing the need to reduce both the
level of government spending and the costly burdens imposed on business
by government regulation. Correspondingly, private citizens, including
representatives of business and labor, were more frequently expressing
their willingness to moderate their wage and price demands as well as
demands for increased government services.
I view these actions and reactions as highly significant—as necessary
prerequisites for economic policy success. Nonetheless, they do not ensure
that outcome. While we had grounds for optimism as the year closed, concrete results had yet to materialize. Indeed, we could not yet be fully confident that they would soon be forthcoming. And, of course, additional uncertainties were raised by OPEC's announced increases in oil prices.

Thus, as the year closed, it remained fair to ask whether we had laid the
appropriate and sufficient foundation for reducing inflation and restoring
the dollar to a position of integrity, and, further, whether these goals would
be achieved free of the social costs of recession. Therefore, I feel it fair to
state that although important milestones were reached in the economic
policy area in 1978, resolution of our current economic problems remains a
painfully slow process.
I take a similar view of the numerous events that occurred this past year
relating to financial supervision and regulation, the payments mechanism,
and other areas of financial institution operations. Among the many important developments in the operations area was the adoption of a proposal for
the Federal Reserve to provide a system for nationwide interchange of
automated clearing house payments data, a step that should provide substantial impetus for progress in the electronic funds transfer area. Implementation of the Treasury tax and loan investment program in 1978 not
only enabled the federal government to earn interest on the balances it
keeps at financial institutions but also eliminated one distinction betw2en
financial institutions by allowing depositories other than commercial banks
to participate in the tax deposit system. And perhaps of greatest significance
from my vantage point as president of a Federal Reserve bank, the first draft
of a pricing schedule for Federal Reserve payments services was issued for
public discussion, an action that I hope will spur the comprehensive analysis
needed to resolve the interrelated issues of access to Federal Reserve services and Federal Reserve membership.
More numerous were significant developments in the area of supervision and regulation. Some of these developments clearly tend to subject
financial institutions to more extensive restrictions on their operations.
Primary examples are the International Banking Act and the Financial Institutions Regulatory and Interest Rate Control Act, both passed late in the
year at about the time regulations implementing the Community Reinvestment Act were finalized.
On the other hand, a number of important developments of 1978 indicate some hope for reduced or simplified regulation and greater reliance
on the marketplace to govern the operation of the financial system. While
the 1978 Financial Institutions Act continued the regulation of interest rates
that various types of financial institutions can pay on deposits, I also note
four actions taken during the year that can be associated with a liberalization of restrictions in this area. Two, in fact, were provisions of this same
act—specifically, the elimination of the commercial bank-thrift institution
differential with respect to savings accounts linked to automatic transfer
and the extension of NOW accounts to New York State. The two other actions were taken by regulatory agencies: the authorization of six-month
money market certificates, which in effect introduced a floating interest
rate ceiling, and the authorization of the automatic transfer service, a step
that comes as close as possible under existing law to permitting depositors
outside NOW account states to earn interest on transactions balances.
Along this same line of developments promising reduced or simplified
regulation were efforts toward greater coordination between the federal

5

supervisory authorities, including their joint adoption of uniform bank
rating systems and the provision in the 1978 Financial Institutions Act for a
Federal Financial Institutions Examination Council.
Thus, as in the area of economic policy, we saw a number of important
events affecting the American financial system. But although many of these
developments touched on issues that have been debated throughout the
1970s, ultimate resolutions failed to emerge during the year.
We have yet to reach a consensus regarding several fundamental
questions: How should electronic funds transfer systems be operated to
make sure the public interest is served? Is the public benefited or harmed
by the regulation of deposit interest rates? Do we need more or less regulation, particularly with respect to the financial industry? And how should our
regulatory system be structured—would consolidation of the various agencies lead to more or less effective regulation? To meet social goals, do we
want to continue to impose, by law and regulation, the traditional distinctions between financial institutions? Or, could we still meet our social and
economic goals if we left their achievement more to those institutions—by
allowing them to determine their own areas of operation and
specialization—and to the interplay of market forces? And finally, what
should be the relationship of our nation's central banking system, the
Federal Reserve, to financial institutions? Is open access to its services
warranted, and if so, how should it be accommodated? Should our present
voluntary membership system be preserved? If so, what changes are
necessary and can be adopted to preserve it? Alternatively, does our financial structure as it appears today call for a significant restructuring?
That these questions remain unanswered—that the membership issue
was not resolved by the time 1978 came to a close—was for me, personally,
the greatest disappointment of the year. The lack of a solution to this
problem means not only that the Federal Reserve and its member commercial banks will continue to bear undue burdens but also that little progress
can be made on the related issues of access to and pricing of Federal
Reserve services. The various membership proposals considered during the
year encompassed almost every imaginable approach to the problem—
from making membership a more attractive alternative to effectively
eliminating the concept of membership altogether. But none of the
proposals garnered enough support for adoption, and each met strong opposition from interested parties.

6

At the same time, I remain hopeful that what was not accomplished in
1978 can be achieved in 1979. After all, more serious discussion of the
problem and possible solutions to it took place in 1978 than in any previous
year. Clearly some unanimity of opinion has emerged; financial industry officials and Congress now appear to share with the Federal Reserve the view
that the membership problem must be addressed expeditiously.
So I hope that when 1979 closes, I will be able to say that this major issue
has been put behind

1976 financial statements
The financial statements of private enterprises—balance sheets and
statements of income—are statistical indicators of current and future
capacity to generate earnings. They provide a basis for evaluating performance. By contrast, Federal Reserve banks do not operate under an earnings objective although substantial earnings are incidental to the functions
performed. Changes in their major asset, liability and income items reflect
developments in the economy and actions undertaken in support of System
monetary objectives. Income consists mainly of interest on each bank's
share of the System's portfolio of Treasury securities. Most of this is returned
to the Treasury after expenses and statutory dividends to member banks are
paid.
Through purchases of securities and loans to member banks, the
Federal Reserve banks increase the base for expansion in currency and
deposits in accord with the economy's growth needs. Additions to member
bank reserve deposits that result from this process are either withdrawn as
currency or used to support the public's deposits at commercial banks.
During 1978 this bank's share of securities held in the System Open
Market Account increased by $1.3 billion, as System monetary policy actions were aimed at providing reserves to the banking system sufficient to
finance moderate expansion in the nation's economy while resisting inflation and contributing to a sustainable pattern of international payments.
The increase in Reserve Bank credit outstanding was primarily absorbed,
however, by the payout of currency (Federal Reserve notes outstanding) in
response to public demands. Member bank reserves increased last year as a
result of increased total deposits and higher reserve requirements on large
time deposits.
Increased interest income from the larger portfolio of loans and
securities as well as higher market interest rates more than offset this bank's
share of losses on sales of securities and sizable foreign exchange losses entailed in currency stabilization operations. Net earnings rose by over $173
million, producing a record payment of over $1 billion to the U.S. Treasury.

7

Statement of condition
(in thousands of

dollars)

As of December 31
1978
Assets
Gold certificate account
Interdistrict settlement account
Special drawing rights
certificate account
Coin

1977

1,762,680
183,836

1,735,954
89,375

215,000
13,865

198,000
24,371

Total loans and securities

67,175
1,259,214
17,460,051
18,786,440

41,575
1,282,151
16,166,456
17,490,182

Cash items in process of collection
Bank premises
Other assets
Total assets

1,624,385
15,637
588,584
23,190,427

1,366,649
15,686
261,533
21,181,750

17,189,680

15,427,599

4,090,893
427,940
31,013
107,306
4,657,152

3,591,303
704,511
41,355
90,167
4,427,336

757,482
260,909
22,865,223

834,240
178,509

Loans and securities:
Loans
Federal agency securities
U.S. Government securities

Liabilities
Federal Reserve notes
Deposits:
Member bank reserves
U.S. Treasury—general account
Foreign
Other
Total deposits

6

Deferred availability cash items
Other liabilities
Total liabilities
Capital accounts
Capital paid in
Surplus
Total capital
Total liabilities and capital

162,602
162,602
325,204
23,190,427

20,867,684

157,033
157,033
314,066
21,181,750

Statement of earnings
(in thousands of dollars)
Year ending December 31
1978

1977

8,003
1,325,213

2,763
1,082,419

297
248

422
239

1,333,761

1,085,843

81,679
8,412

79,726
7,370

Total current expenses
Less reimbursement for certain
fiscal agency and other expenses

90,091

87,096

7,307

7,726

Current net expenses

82,784

79,370

1,250,977

1,006,473

(20,792)

(7,994)

(77,369)

(21,958)

(8,130)
(36)

(7,153)
2,141

(106,327)

(34,964)

Current earnings:
Interest on loans to member banks
Interest on Government securities
Interest on investments of
foreign currencies
All other
Total current earnings
Current expenses:
Operating expenses
Cost of Federal Reserve currency

Current net earnings
Additions to (or deductions from)
current net earnings:
Net profit (or loss) on sales
of securities
Net profit (or loss) on foreign
exchange transactions
Assessment for expenses of
Board of Governors
All other—net
Net additions (or deductions)
Net earnings before payments to
U.S. Treasury
Distribution of net earnings:
Dividends paid
Payments to U.S. Treasury (as interest
on Federal Reserve notes)
Transferred to surplus

9

1,144,650

971,509

9,603

9,144

1,129,478
5,569

953,290
9,075

1,144,650

971,509

Summary of operations
Dollar amount
1978
Clearing and collection operations
Commercial bank checks collected . . 991.8 billion
U.S. Government checks collected 1 .. 60.0 billion
4.7 billion
Automated payments processed
Wjre transfers of funds
7.9 trillion
Corporate and municipal bonds,
coupons and other noncash items
collected
1.9 billion
Currency and related operations
Currency received and counted
7.5 billion
Unfit currency withdrawn
1.4 billion
Coin received and counted
262.1 million
Food stamps received and processed. 858.6 million
Loans to member banks
Total loans made during year
Banks accommodated
Services to U.S. Treasury
Marketable Government securities
issued, serviced and redeemed:
Definitive securities
Book entry securities
U.S. savings bonds issued,
serviced and redeemed
Federal taxes processed
Member bank "service" operations
Safekeeping of securities:
Definitive, balance December 31 ..
Book entry, balance December 31 .
Securities purchased and sold
for member banks

15.0 billion
—

Number

1977

906.4
46.8
3.1
7.1

billion
billion
billion
trillion

1.8 billion
7.1
1.2
215.5
873.1

billion
billion
million
million

6.3 billion
—

1978

2.0
90.3
14.0
4.2

billion
million
million
million

563.3 thous.
936.2
274.4
2.0
224.0

million
million
billion
million

5,870
299

1977

2.0
96.3
10.0
3.7

billion
million
million
million

538.5 thous.
894.3
302.6
1.6
226.0

million
million
billion
million

2,001
209

3.2 billion
1.0 trillion

4.9 billion
0.7 trillion

304.3 thous.
327.5 thous.

4.1 billion
56.9 billion

3.7 billion
48.6 billion

62.2 million
0.8 million

60.2 million
0.8 million

9.7 billion
43.2 billion

8.2 billion
42.3 billion

1.7 million

1.5 million

1.8 billion

1.3 billion

25.9 thous.

—

326.7 thous.
268.8 thous.

—

12.4 thous.

includes postal money orders.

11

Executive chcinqes
Directors and Council member
Robert H. Strotz, president of Northwestern University, was redesignated chairman of the board for 1979. John Sagan, vice president-treasurer of Ford Motor Company, was redesignated deputy chairman. Both are Class C (nonbanker) directors
appointed by the Board of Governors. Formerly a director of the Detroit branch, Mr.
Sagan was named to the board of the Federal Reserve Bank in 1978.
The other Class C director is Edward J. Brabec, business manager for the
Chicago Journeymen Plumbers, Local 130. Mr. Brabec, who joined the board in
1978, was reappointed to a full three-year term beginning in 1979.
Arthur T. Decio, chairman of Skyline Corporation in Elkhart, began a three-year
term in 1978 as a Class B (nonbanker) director.
Member banks in the Seventh District elected two new Class B (nonbanker)
directors of the Federal Reserve Bank. Beginning in 1979, Mary Garst, manager of the
Cattle Division of Garst Company in Coon Rapids, Iowa, will replace Paul V. Farver,
retired vice chairman of Rolscreen Company in Pella, Iowa. Dennis W. Hunt, president of Hunt Truck Lines in Rockwell City, Iowa, will replace Oscar G. Mayer, retired
chairman of the executive committee of Oscar Mayer and Company, Madison.
Three new members joined the board of the Detroit branch during 1978.
Howard F. Sims, president of Sims-Varner and Associates in Detroit, was appointed
by the Board of Governors as a replacement for Mr. Sagan. L.A. Johns, president of
Isabella Bank and Trust at M o u n t Pleasant, Michigan, and Rodkey Craighead, chairman of Detroit Bank Corporation, were appointed by directors of the Federal
Reserve Bank as replacements for Harold A. Elgas, president of Gaylord State Bank at
Gaylord, Michigan, and Benjamin H. Paddock III, president of City National Bank of
Detroit.
Joining the board at the Detroit branch in 1979 will be James H. Duncan, chairman of First National Bank and Trust Company in Kalamazoo. He was appointed by
the bank's board to replace Joseph B. Foster, chairman of Ann Arbor Bank and Trust
Company .
Roger E. Anderson, chairman of the board of Continental Illinois National Bank
in Chicago, was appointed to represent the Seventh District on the Federal Advisory
Council in 1979.
Official changes

12

Official changes included the promotion of Fred A. Dons to the senior vice
president level. He continues to serve as general auditor.
William H. Gram was promoted from assistant general counsel to vice president,
associate general counsel, and assistant secretary. Also in the Legal Department,
William M . Lloyd was appointed assistant counsel.
Thomas C. Tucker, assistant vice president, was promoted to vice president in
Automation Services .
Rose M . Kubush and James A. Bluemle were made assistant vice presidents in
the Supervision and Regulation Department.
Daniel P. Kinsella, assistant vice president, was made vice president in charge of
cash operations, beginning in 1979.
William C. Conrad, vice president and manager of the Detroit branch, was
promoted to senior vice president. Glen Brooks was appointed assistant vice president.
Frederick S. Dominick, vice president at Chicago, was assigned to the Detroit
branch with responsibility for accounting, cash, loans, and the fiscal agency
operations there.
Robert M . Fitzgerald, assistant vice president at the branch, was promoted to
vice president. His new responsibilities include check processing and wire transfer
as well as personnel and support services.

Officers

(as of December

31, 1978)

ROBERT P. MAYO, President
DANIEL M . DOYLE, First Vice President

CHARLES W. FURBEE, Assistant Vice President
CAROL P. KASPAR, Assistant Vice President
DANIEL P. KINSELLA, Assistant Vice President
ERICH K. KROLL, Assistant Vice President
ROSE M . KUBUSH, Assistant Vice President
WILLIAM M . LLOYD, Assistant Counsel
LARRY R. MOTE, Senior Economist and
Assistant Vice President

Robert P. Mayo

Daniel M. Doyle

JAMES H. NASH, JR., Assistant Counsel
RICHARD H. RAMSDELL, Assistant Vice President

WARD J. LARSON, Senior Vice President,
General Counsel, and Secretary
JAMES R. MORRISON, Senior Vice President
KARL A. SCHELD, Senior Vice President and
Director of Research
HARRY S. SCHULTZ, Senior Vice President
BRUCE L. SMYTH, Senior Vice President
RICHARD D. ABRAHAMSON, Vice President
PAUL J. BETTINI, Vice President

HARVEY ROSENBLUM, Senior Economist and
Assistant Vice President
WALTER A. SIENKO, Assistant Vice President
DAVID R. STARIN, Assistant Vice President
ARTHUR G. STONE, Assistant Vice President
HILBERT G. SWANSON, Assistant Vice President
WARREN J. TAUBMAN, Assistant Vice President
PATRICK J. TRACY, Assistant Chief Examiner
RUTH F. VILONA, Assistant Vice President

GEORGE W. CLOOS, Economic Adviser and
Vice President

CARL C. WELKE, Assistant Vice President

FRANKLIN D. DREYER, Vice President

ROBERT W. WELLHAUSEN, Assistant Vice President

WILLIAM H. GRAM, Vice President, Associate
General Counsel and Assistant Secretary

PATRICIA W. WISHART, Assistant Vice President and
Assistant Director of Research

RODERICK L. HOUSENGA, Chief Examiner

THOMAS L. WOLFE, Examining

JOSEPH G. KVASNICKA, Economic Adviser and
Vice President
RICHARD A. MOFFATT, Vice President
WILLIAM T. NEWPORT, Vice President
DOROTHY M . NICHOLS, Economic Adviser and
Vice President
LOUIS J. PUROL, Vice President, district offices
WILLIAM ROONEY, Vice President
RAYMOND M . SCHEIDER, Vice President
ROBY L. SLOAN, Vice President and
Associate Director of Research
ADOLPH J. STOJETZ, Vice President

Officer

Detroit branch
WILLIAM C. CONRAD, Senior Vice President and Manager
FREDERICK S. DOMINICK, Vice President
ROBERT M . FITZGERALD, Vice President
WAYNE R. BAXTER, Assistant Vice President
GLEN BROOKS, Assistant Vice President
ROBERT W. COOK, Assistant Vice President

Des Moines office
THOMAS P. KILLEEN, Assistant Vice President

THOMAS C. TUCKER, Vice President
CARL E. VANDER WILT, Vice President

Indianapolis office

EUGENE J. WAGNER, Vice President

RICHARD L. SIMMS, JR., Assistant Vice President

ALLEN G. WOLKEY, Vice President
JAMES A. BLUEMLE, Assistant Vice President

Milwaukee office

HARRIS C. BUELL, JR., Assistant Vice President

RUSSELL O. LANGAN, Assistant Vice President

Directors

Board of Directors,
Federal Reserve Bank
of Chicago, from left to right: (standing) Messrs. Abboud,
Messrs. Mayer, Strotz, Farver; (not shown) Mr. Decio.

(as of December

Spies, Sagan, Brabec, DeLay;

ROBERT H. STROTZ, Chairman
President
Northwestern University
Evanston, Illinois

EDWARD F. BRABEC
Business Manager
Chicago Journeymen Plumbers,
Local 130
Chicago, Illinois

JOHN SAGAN, Deputy Chairman
Vice President-Treasurer
Ford Motor Company
Dearborn, Michigan

ARTHUR j. DECIO
Chairman of the Board
Skyline Corporation
Elkhart, Indiana

A. ROBERT ABBOUD
Chairman of the Board
The First National Bank of Chicago
Chicago, Illinois

JAY J. DeLAY
President
Huron Valley National Bank
Ann Arbor, Michigan

31, 1978)

(seated)

PAUL V. FARVER
Vice Chairman
Rolscreen Company
Pella, Iowa
OSCAR G. MAYER
Chairman, Executive
Committee
Oscar Mayer & Co.
Madison, Wisconsin
JOHN F. SPIES
President
Iowa Trust and
Savings Bank
Emmetsburg, Iowa

Directors of Federal Reserve bonks and branches

14

Directors of the Federal Reserve Bank, under the general supervision of the
Board of Governors of the Federal Reserve System, supervise the operations of the
bank and ensure that the affairs of the bank are administered fairly and impartially.
Drawing on their broad experience and knowledge of regional conditions, the
directors provide the president of the bank and the Board of Governors information
for use in formulating monetary policy. A n d because of their association with the
Federal Reserve, they contribute to better public understanding of the Federal
Reserve System and its actions. At least once every 14 days, they establish the discount rate charged member banks borrowing from the bank, subject to the review
and determination of the Board of Governors.
Each Federal Reserve bank has nine directors serving three-year terms. Three
Class A and three Class B directors are elected by member banks in the district. Three
Class C directors are appointed by the Board of Governors. For the election of Class
A and B directors, member banks are classified by the Board of Governors into three
groups according to their capitalization. Each group elects one Class A and one Class
B director.
Class A directors are representative of the member banks. Class B and C directors represent the public; they cannot be officers, directors, employees, or, in the
case of Class C directors, stockholders of a bank. These nonbanking directors are

Detroit branch
JORDAN B. TATTER, Chairman
President and Chief Executive Officer
Southern Michigan Cold
Storage Company
Benton Harbor, Michigan
RODKEY CRAIGHEAD
Chairman of the Board
Detroit Bank & Trust Company
Detroit, Michigan
HERBERT H. DOW
Secretary
The Dow Chemical Company
Midland, Michigan
JOSEPH B. FOSTER
Chairman of the Board
Ann Arbor Bank & Trust Company
Ann Arbor, Michigan
LAWRENCE A. JOHNS
President
Isabella Bank and Trust
Mount Pleasant, Michigan
CHARLES R. MONTGOMERY
President
Michigan Consolidated Gas Company
Detroit, Michigan
HOWARD F. SIMS
President
Sims-Warner & Associates, Inc.
Detroit, Michigan

Board of Directors,
Johns,

Detroit

branch,

Foster, Sims, Montgomery,

(not shown) Mr.

from

left to right:

Craighead;

(standing)

(seated) Mr.

Tatter;

Dow.

Federal Advisory

Council

Member

EDWARD BYRON SMITH
Chairman of the Board
The Northern Trust Company
Chicago, Illinois
Auditors

(reporting to Bank's Board of Directors)

FRED A. DONS, General Auditor
RICHARD P. BUSH, Assistant General Auditor
ROBERT A. LUDWIG, Assistant General Auditor

chosen with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers.
One Class C director is designated by the Board of Governors as chairman of the
board of directors and Federal Reserve Agent. Another is appointed deputy chairman.
Branches of Federal Reserve banks have either five or seven directors. (The
Detroit branch has seven.) A majority of the branch directors are appointed by
directors of the parent Federal Reserve bank. They meet the same qualifications as
Class A or B directors at the head office.
The other branch directors are appointed by the Board of Governors. They are
selected according to generally the same criteria as Class C head-office directors, the
difference being that they can be stockholders in banks.
The chairman of the branch board is selected from directors appointed by the
Board of Governors using a method prescribed by the parent Federal Reserve bank.
The directors of the Detroit branch, for example, elect their chairman. The directors
of the branch assist the bank's board of directors in overseeing the operations of the
branch. In addition, just as with directors of the bank, they provide two-way communication between the Federal Reserve and the public, ensuring participation by
regional representatives in the formulation of monetary policy.

15

Messrs.

FEDERAL RESERVE BANK
OF CHICAGO
Public Information Center
P. O. Box 834
Chicago, Illinois 60690
(312) 322-5112