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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