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G Annual Report 1974 To the member banks of the Seventh Federal Reserve District Public policy in 1974 had to deal with twin problems of an accelerated rate of inflation and a weakening economy. As the year ended, the major challenge was to reverse the economic contraction w i t h o u t undermining the foundation for noninflationary growth in the future, a foundation laid by the 1974 restraint on the expansion of money and credit. That restraint entailed painful pressures on financial markets and on some business firms, including banks, whose liquidity positions were low. The Federal Reserve System, however, supplied the reserves needed to support very large credit flows and to avert serious temporary liquidity problems. The financial and operations statements of this bank reflect growth in the transactions of the public, higher prices and interest rates, and the System's policy actions. O u r share of U.S. Government securities and federal agency obligations held by the System O p e n Market Account, the major source of reserves to the banking system, increased $745 million in 1974. Loans t o member banks reached a peak of $400 million during the summer, but were smaller at year-end than on December 31, 1973. The gold certificate account increased $351 million in 1974, resulting from settlement of net fund flows among Federal Reserve districts. In total, assets increased almost $1 billion, to $17.4 billion. The increase in member bank reserves was somewhat less than the rise in Reserve bank credit, largely because of drains to meet increased currency demands of the public, as reflected in the rise in this bank's Federal Reserve notes outstanding. Net earnings in 1974 were $892 million, an increase of 24 percent over 1973. O f this, $879 million was transferred to the U.S. Treasury as interest on Federal Reserve notes. O u r statement of operations shows increases in volume of each type of operation except noncash collection items and securities held in safekeeping. A slightly larger number of member banks borrowed at least once in 1974 than in the previous year. The number of coins and pieces of currency counted rose 7 and 10 percent, respectively, and more than 1.5 billion commercial bank checks were collected. Transfers of funds expanded most rapidly, increasing 26 percent to 2.4 million transfers totaling $4.7 trillion. Each year seems to present greater challenges for commercial banks and the Federal Reserve System, and necessity for cooperation and communication between us grows. O u r directors, officers, and staff join in thanking you for your help in 1974. Sincerely. Robert P. M a y o President December 31, 1974 Statement of earnings 1974 1973 $ 14,400,307 $ 16,287,284 957,845,827 778,388,289 Current earnings: Advances and discounts U.S. Government securities Foreign currencies 1,071,903 69,226 448,604 285,432 $973,766,641 $795,030,231 $ 65,696,326 $ 56,380,771 All other Total current earnings Current expenses: Operating expenses Federal Reserve currency 2,827,823 3,927,084 Assessment for expenses of Board of Governors 6,422,600 6,961,600 $ 74,946,749 $ 67,269,455 Total Less reimbursement for certain fiscal agency and other expenses 6,574,313 5,315,357 Current net expenses $ 68,372,436 $ 61,954,098 Current net earnings $905,394,205 $733,076,133 $ $ Additions to current net earnings: Profit on sales of U.S. Government securities (net) All other Total additions — 394,831 — 166,034 $ 394,831 $ $ 6,681,914 $ 166,034 Deductions from current net earnings: Loss on sales of U.S. Government securities (net) Loss on foreign exchange transactions (net) 5,332,468 All other 5,659,178 7,444,395 1,905,001 50,712 $ 13,919,383 $ 13,154,285 Net deductions from (-) or additions to current net earnings - 13,524,552 - 12,988,251 Net earnings before payments to U.S. Treasury $891,869,653 $720,087,882 Dividends paid $ $ Total deductions Payments to U.S. Treasury (interest on Federal Reserve notes) Transferred to surplus 8,130,874 878,637,779 $ 5,101,000 7,729,090 704,086,842 $ 8,271,950 Surplus account Surplus, January 1 Transferred to surplus—as above Surplus, December 31 $132,422,100 $124,150,150 5,101,000 8,271,950 $137,523,100 $132,422,100 Statement of condition December 31, 1974 December 31, 1973 Assets Gold certificate account $ 1,946,092,617 $ 1,595,272,313 Special drawing rights certificate account 70,000,000 70,000,000 Federal Reserve notes of other banks 77,583,000 68,620,400 Other cash 24,270,630 32,514,805 Loans: Secured by U.S. Government securities 13,400,000 37,560,000 Other 14,950,000 158,345,000 Total loans $ Federal agency obligations, bought outright 28,350,000 $ 195,905,000 767,912,000 315,617,000 U.S. Government securities 13,074,207,000 12,780,765,000 Total loans and securities $13,870,469,000 $13,292,287,000 1,290,588,731 1,288,752,664 Cash items in process of collection Bank premises 15,969,984 16,215,278 153,340,494 133,062,673 $17,448,314,456 $16,496,725,133 $11,373,962,255 $10,926,364,364 4,196,056,629 3,516,514,296 279,630,839 207,841,508 Other assets Total assets Liabilities Federal Reserve notes Deposits: Member bank reserves U.S. Treasury—general account Foreign 45,530,000 40,820,000 Other 90,587,238 437,937,122 $ 4,611,804,706 $ 4,203,112,926 Total deposits Deferred availability cash items 1,014,602,414 952,058,072 172,898,881 150,345,571 $17,173,268,256 $16,231,880,933 $ $ Other liabilities Total liabilities Capital accounts Capital paid in Surplus Total liabilities and capital accounts Contingent liability on acceptances purchased for foreign correspondents 137,523,100 132,422,100 137,523,100 132,422,100 $17,448,314,456 $16,496,725,133 $ $ 154,299,600 91,232,700 Statement of operations Dollar amount 1974 Loans to member banks Currency counted Coin counted Checks collected: 1 Commercial bank checks U.S. Government checks2 Noncash collection items Transfers of funds U.S. savings bonds issued, exchanged, redeemed Other government securities issued, exchanged, redeemed Securities held in safekeeping Food stamps processed 1973 22.4 billion 6.6 billion 201.0 million 703.2 33.4 1.3 4,729.2 Number of items billion billion billion billion 30.1 billion 6.1 billion 175.0 million 642.3 29.2 1.4 3,783.2 billion billion billion billion 1974 1973 3811 814.0 million 1.5 billion 3631" 741.3 million 1.4 billion 1.5 103.2 1.6 2.4 billion million million million 1.4 99.5 1.6 1.9 billion million million million 3.6 billion 3.5 billion 56.3 million 56.0 million 262.9 billion 16.7 billion 667.6 million 247.7 billion 14.8 billion 491.0 million 2.0 million 1.6 million 309.2 million 1.7 million 1.6 million 264.6 million tNumber of banks accommodated. Totals include the Chicago bank, the Detroit branch, and the Des Moines and Indianapolis offices, includes postal money orders. 1 Directors as of December 31, 1974 W I L L I A M H. FRANKLIN, C h a i r m a n and Chief Executive O f f i c e r Caterpillar Tractor C o m p a n y Peoria, Illinois [ C h a i r m a n ] PETER B. CLARK, Chairman of t h e Board and President Evening News Association D e t r o i t , M i c h i g a n [Deputy Chairman] JAY J. DE LAY, President H u r o n Valley National Bank Ann Arbor, Michigan PAUL V. FARVER, President Rolscreen C o m p a n y Pella, Iowa J O H N T. HACKETT, Executive Vice President C u m m i n s Engine C o m p a n y , Inc. C o l u m b u s , Indiana OSCAR C. MAYER, C h a i r m a n , Executive C o m m i t t e e Oscar M a y e r & Co. M a d i s o n , Wisconsin E D W A R D BYRON SMITH, C h a i r m a n of t h e Board T h e N o r t h e r n Trust C o m p a n y Chicago, Illinois ROBERT H. STROTZ, President N o r t h w e s t e r n University Evanston, Illinois FLOYD F. W H I T M O R E , President The O k e y V e r n o n First National Bank C o r n i n g , Iowa FRED A. D O N S , General A u d i t o r R I C H A R D P. BUSH, Assistant General A u d i t o r ROBERT A. L U D W I G , A u d i t O f f i c e r Member of Federal Advisory Council ALLEN P. STULTS, C h a i r m a n of the Board A m e r i c a n National Bank and Trust C o m p a n y of Chicago Chicago, Illinois Detroit branch W I L L I A M M . DEFOE, C h a i r m a n of t h e Board Defoe Shipbuilding Company Bay City, M i c h i g a n [ C h a i r m a n ] H A R O L D A. ELGAS, President G a y l o r d State Bank Gaylord, Michigan JOSEPH B. FOSTER, President A n n A r b o r Bank Ann Arbor, Michigan T O M KILLEFER, Vice President—Finance and General Counsel Chrysler C o r p o r a t i o n Detroit, Michigan R O L A N D A. M E W H O R T , D i r e c t o r and Consultant M a n u f a c t u r e r s National Bank Birmingham, Michigan ROBERT M . S U R D A M , C h a i r m a n of t h e Board National Bank of D e t r o i t Detroit, Michigan J O R D A N B. TATTER, District Extension H o r t i c u l t u r a l A g e n t for Southwest M i c h i g a n M i c h i g a n State University Paw Paw, M i c h i g a n Officers ROBERT P. M A Y O , President ERNEST T. B A U G H M A N , First Vice President (Elected President, Federal Reserve Bank of Dallas, effective December 9, 1974.) CARL E. BIERBAUER Senior Vice President LARRY R. MOTE, Senior Economist and Assistant Vice President WARD J. LARSON, Senior Vice President, General Counsel, and Secretary JAMES H. NASH, JR., Assistant Counsel JAMES R. MORRISON, Senior Vice President RICHARD H. RAMSDELL, Assistant Vice President KARL A. SCHELD, Senior Vice President and Director of Research CHARLOTTE H. SCOTT, Assistant Vice President HARRY S. SCHULTZ, Senior Vice President BRUCE L. SMYTH, Senior Vice President ROBERT E. SORG, Assistant Vice President DAVID R. STARIN, Assistant Vice President ADOLPH J. STOJETZ, Assistant Vice President GEORGE W . CLOOS, Economic Adviser and Vice President ARTHUR G. STONE, Assistant Vice President ROBERT P. CORNELISEN, Vice President WARREN J. TAUBMAN, Assistant Vice President LE ROY A. DAVIS, Vice President T H O M A S C. TUCKER, Assistant Vice President FREDERICK S. D O M I N I C K , Vice President BRUCE A. TURKSTRA, Assistant Vice President HILBERT G. SWANSON, Assistant Vice President RICHARD A. MOFFATT, Vice President RUTH F. VILONA, Assistant Vice President WILLIAM T. NEWPORT, Vice President EUGENE J. WAGNER, Assistant Vice President DOROTHY M . NICHOLS, Economic Adviser and Vice President CARL C. WELKE, Assistant Vice President ROBERT W . WELLHAUSEN, Assistant Vice President WILLIAM ROONEY, Vice President R A Y M O N D M . SCHEIDER, Vice President PATRICIA W. WISHART, Assistant Vice President and Assistant Director of Research ROBY L. SLOAN, Vice President and Associate Director of Research T H O M A S L. WOLFE, Examining Officer JACK P. THOMPSON, Vice President Detroit branch ALLEN G. WOLKEY, Vice President WILLIAM C. C O N R A D , Vice President and Manager BUDDIE J. BELFORD, Assistant Vice President RONALD L. ZILE, Vice President PAUL J. BETTINI, Assistant Vice President ROBERT W . C O O K , Assistant Vice President HARRIS C. BUELL, JR., Assistant Vice President ROBERT M . FITZGERALD, Assistant Vice President CHARLES L. CARTER, Examining Officer PHILIP G. NEHRO, Assistant Vice President FRANKLIN D. DREYER, Assistant Vice President WILLIAM H. GRAM, Assistant General Counsel and Assistant Secretary RODERICK L. HOUSENGA, Chief Examiner ROBERT JOHNSON, Assistant Vice President and Control Officer Des Moines office RUDOLPH W . DYBECK, Vice President T H O M A S P. KILLEEN, Assistant Vice President Indianapolis office JOHN H. KALCHBRENNER, Senior Economist and Assistant Vice President LOUIS J. PUROL, Vice President DANIEL P. KINSELLA, Assistant Vice President RICHARD L. SIMMS, JR., Assistant Vice President ERICH K. KROLL, Assistant Vice President Milwaukee office JOSEPH G. KVASNICKA, Economist and Assistant Vice President CARL E. VANDER WILT, Vice President CAROL P. LA BARBERA, Assistant Vice President RUSSELL O . LANGAN, Assistant Vice President Regulatory changes Regulation D. All member banks were affected by a November restructuring of reserve requirements that was designed to improve the liquidity of the banking system by encouraging member banks to seek longer-term time deposits. As a result of the amendment: • Reserves required against time deposits w i t h maturities of six months or longer were reduced from 5 to 3 percent; • Reserves required against time deposits with maturities of less than six months were increased from 5 to 6 percent, except that the first $5 million of such deposits remain subject to a 3 percent requirement; • Reserves applicable to net demand deposits over $400 million were reduced f r o m 18 to 17.5 percent; • The marginal or supplemental reserve requirement of 3 percent against time deposits in denominations of $100,000 and over maturing in less than four months was removed. The marginal requirement against longer maturities had been removed September 5. Another amendment to Regulation D defined uncollateralized " d u e bills" of more than three days maturity as deposits and made them subject to deposit reserve requirements. Regulation A. A September amendment permitted the application of a "special rate on emergency credit" to member banks. The higher emergency rate can be applied to borrowings for prolonged periods and in significant amounts where the need arises from exceptional circumstances or practices involving a particular bank. This rate initially was set at 10 percent. An October amendment permitted advances to member banks at the lowest discount rate when secured by mortgage loans on one-to-four family residential properties. The Board of Governors approved two changes in the basic discount rate in 1974: an increase from 7.5 to 8 percent effective April 26, and a reduction from 8 to 7.75 percent effective December 10. Also effective December 10, the special rate was lowered from 10 to 9.5 percent. Deposit Insurance and Regulation Q . Effective November 27, the Federal Deposit Insurance Corporation increased the maximum coverage for each insured account from $20,000 to $40,000 and raised the maximum coverage for public time and savings deposits to $100,000. In conjunction with these changes, the Board amended Regulation Q to permit governmental units to hold savings deposits and created a new category of time deposits for governmental bodies. The standard passbook savings deposit ceiling rate of 5 percent applies to savings deposits of governmental units. The rate ceiling applicable to time deposits of governmental bodies at year-end was 7.75 percent, the highest rate that may be paid on time deposits under $100,000 by federally insured commercial banks, mutual savings banks, or savings and loan associations. An amendment to permit member banks to offer longer-term time deposits at more competitive rates established a new category of time deposits, called "investment certificates," effective December 23. The maximum interest rate payable is 7.5 percent per annum on negotiable or nonnegotiable certificates with a m i n i m u m maturity of six years issued in amounts of $1,000 or more. Negotiable investment certificates may not be redeemed prior to maturity but may be used as collateral for loans if the interest rate on the loan is at least 2 percentage points higher than the certificate rate, or the issuing bank may arrange sales between holders and prospective buyers of certificates but may not purchase the certificates for its o w n account. Regulations T, U, and G. These regulations govern credit that may be extended to purchase and carry margin stocks and bonds convertible into margin stocks. O n e amendment reduced the margin requirement from 65 to 50 percent for purchasing or carrying stocks and reduced the required margin on short sales by a like degree. Subsequent amendments changed the over-thecounter margin stock criteria and suspended the "same-day" credit restriction. Regulation Y. Amendments included granting permission to bank holding companies to provide certain kinds of management consulting advice to non-affiliated banks under specified conditions, and permission for bank holding companies to lease real property in addition to personal property. The Board of Governors decided against adding underwriting real estate mortgage guaranty insurance to the list of permissible bank holding company activities. Termination of VFCR Guidelines. The Board announced on January 29 the immediate termination of its Voluntary Foreign Credit Restraint (VFCR) Guidelines. The program was designed to restrain lending and investment overseas by banks and other financial institutions. FEDERAL RESERVE BANK OF CHICAGO BOX 834 CHICAGO, ILLINOIS 60690 FIRST CLASS
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