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A N N U A L R E P O R T 1988 F E D E R A L R E S E R V E B A N K O F C H I C A G O C O N T E N T S Message from Management 1 Shaping the Future: The Bank in 1988 4 Historical Perspectives: The Bank at 75 9 Financial Statements and Executives 33 The Federal Reserve Bank of Chicago, as part of the nation's central banking system, serves the Seventh District which includes major portions of Illinois, Indiana, Michigan, and Wisconsin plus all of Iowa. Its role is to foster a healthy financial system and economy by participating in the formulation and conduct of the nation's monetary policy, supervising banks and bank holding companies, and providing banking services to depository institutions and the U.S. government. ". . . The Federal Reserve Act is the bulwark and safeguard of our banking resources, just as our Federal Constitution was framed to protect the rights, liberties and opportunities of the people of the Nation as a whole." G O V E R N O R JAMES B. MCDOUGAL, First Chief Executive Officer, Federal Reserve Bank of Chicago, May 1919 M E S S A G E FROM M A N A G E M E N T Seventy-five years have passed since President Woodrow Wilson signed the Federal Reserve Act, launching the nation's third, and certainly most successful, experiment in central banking. Such a milestone provides a natural temptation to look back, so in this spirit, our 1988 Annual Report includes a retrospective that we hope you will find of interest. The story it tells is actually rather exciting—an excitement stirred not so much by the drama ofpast events as by what it suggests about the future. Reviewing the three quarters of a century of the Bank's history reveals certain very distinct and very positive themes. The during this expansion— ups and downs of our and all indications nation's economy are point toward further clear during that period, growth. but through them, the CHAIRMAN ROBERTJ. CHAIRMAN ROBERT J. DAY DAY steady progress in our With continued, DEPUTY CHAIRMAN MARCUS ALEXIS albeit more moderate, economic and financial system is evident. Just as expansion anticipated for 1989, the most significant clearly, an unmistakable theme of commitment risk relates to inflation. While we can be pleased emerges from the Bank's story—a dedication to public about our recent price experience compared to a decade service and a desire to play a vital role in the economic ago, a worrisome pattern of successively higher life of the region and nation. Most of all, our look inflation rates is evident over the last few years. back suggests that these themes of the last 75 years, so However, the lessons of the late 1970s and early clearly echoed by the developments of 1988, will con- 1980s are not forgotten within the Federal Reserve. tinue to set a very positive tone for the period ahead. And motivated by the particularly harsh consequences The state of the economy certainly of those experiences for the Midwest, the Chicago provides cause for confidence in the future. Overall, Reserve Bank has, through our recent economic 1988 was a very good year, adding to the achieve- research initiatives, gained an even better under- ments of what was already the longest peacetime standing of the processes that shape our region and expansion in our nation \s history. With the Gross affect our monetary policy actions. So while the National Product approaching the $5 trillion level, monetary policy challenge looms large, we can be industrial production continued to advance at a reassured by the Federal Reserve's continuing healthy pace—a particularly good sign for those of us commitment to price stability and our own Bank's in the Midwest. Most rewarding of all was the ability to participate in the development of policy employment story—over 16 million new jobs created in pursuit of that end. Similarly, the outlook for the financial ". . . an unmistakable theme of commitment emerges from system and the Chicago Reserve Bank's role within it the Bank's story—a dedication is very positive. Despite continued turbulence, to play a vital role in the to public service and a desire economic life of the region particularly in the thrift industry, the financial and nation." system remains resilient, and banking conditions in 1988 followed the positive trends of the past few PRESIDENT SILAS KEEHN years. And important accomplishments by this Bank Funds Act during 1988. At the same time, we during 1988 should help foster the safety and further improved the quality of our service offerings soundness of the financial system into the future. and the efficiency, reliability, and security of our Like its counterparts within the Federal Reserve System, the Bank in 1988 further upgraded operations, again exceeding our expense containment, cost recovery, and other financial goals. its monitoring techniques and abilities in line with The accomplishments of the past year a rapidly changing and increasingly complex finan- are a tribute to the tireless efforts of our employees, the cial environment. And taking a broader view of leadership of our officers, and the wise counsel of our the responses required by a changing environment, directors. In the tradition of all their predecessors of the Bank in 1988 developed a comprehensive the past 75 years, the dedication and commitment proposal, discussed further in the next section of this put forth by these individuals today sets the standard report, for the restructuring of the regulatory system. for the Federal Reserve Bank of Chicago tomorrow. The Bank also contributed to the smooth operation of the financial system as a provider of services to depository institutions, the government, ROBERT J. DAY CHAIRMAN and the public. The Bank successfully met the enormous challenges of implementing the Expedited SILAS KEEHN PRESIDENT MARCUS ALEXIS DEPUTY CHAIRMAN S H A P I N G T H E F U T U R E : T H E B A N K I N 1 9 8 8 Shaping the future with a new regulatory plan While banking conditions improved in the District during 1988, it remained clear that fundamental changes in the nation's system of financial regulation are called for. To this end, staff from various areas of the Bank, including Economic Research, Supervision and Regulation, and Legal, joined forces to develop a comprehensive proposal for financial restructuring. The shortcomings of a structure designed in the 1930s were reflected in the current problems of the financial services industry—excessive risk-taking, high rates of failure among both thrifts and banks, and the declining profitability of traditional banking services which encouraged banks to seek entry to new activities. Within this environment, bankers have been pushing to eliminate the barriers between banking and the rest of the financial services industry while regulators have become increasingly S H A P I N G THE F U T U R E : THE BANK IN 1988 In this the 75th anniversary year of the Federal Reserve, the concerned that adequate protections be put in place to assure the Chicago Reserve Bank is pausing only momentarily to examine its stability of the banking system. origins and development, not dwelling on past accomplishments. In The challenge taken on by the Chicago Reserve Bank was to develop a plan thai would accomplish both goals—that would fact, 1988 has been a forward-looking year, a time for innovation and permit banking organizations to take full advantage of broader change designed to shape the future of the financial system. We powers without threatening the solvency of the deposit insurance highlight a few of those innovations here. funds or the stability of the banking system. The plan that emerged contained three essential elements: • Creating a corporate structure that would protect the banking subsidiaries of diyersified bank holding companies; • Limiting the protections of the bank safety net to depository institutions; and • Establishing a buffer between bank equity and deposits in the form of subordinated debt, so as to foster market discipline and facilitate timely closure of insolvent institutions. The first element of the plan focuses on insulating banks from the risks associated with broader powers. Bank holding companies would be free to pursue a broad array of financial activities, but only through nonbank subsidiaries, while banks would be limited to traditional lending and deposit functions. Effective "firewalls," with meaningful penalties for violating them, are essential elements of the proposed corporate 5 The Seventh District Network, designed to meet the communications needs of the Bank and its customers well into the future, was completed in 1988. In the case of a failing institution, equity capital would be extinguished as the bank's losses increased, but the subordinated debt, acting as a buffer between stockholders and depositors, would provide continued protection for depositors and the publicly underwritten structure. These firewalls would take the form of requiring insurance fund while bank reorganization and recapitalization separate directors and officers for the bank and nonbanking plans were being developed. subsidiaries, limiting inter-affiliate transactions, and providing While not fail-safe, the Chicago plan seeks to avoid the assurances that the bank can operate on a stand-alone basis types of deposit runs and traumatic closings or regulatory rescues without support from other subsidiaries. that the financial industry has been experiencing. At the same The separation of the banking and nonbanking functions time, it puts more of the cost of insolvency in the private sector, of the holding company is important to the operation of the where it belongs. Hopefully, the plan will serve as a springboard regulatory safety net. This net includes access to the discount for meaningful debate and action on regulatory reform. window, the payment system—particularly electronic transfers of large dollar payments through FedWire—and deposit insurance. Shaping the future through Expedited Funds Availability With firewalls around the bank, regulators could ensure that the Among changes in the Bank's operations areas during availability of the discount window and the FedWire network does 1988, the one receiving the most widespread public attention was not spread to the nonbanking, unsupervised subsidiaries of the the implementation of the Expedited Funds Availability Act (EFA). holding company. Passed by Congress in 1987, the Act was designed to ensure the The plan calls for deposit insurance, an important prompt availability of funds to bank customers and to expedite the element of the safety net, to be substantially modified to provide return of checks. market discipline and proper incentives for banks. Rather than To fully implement EFA by September 1988 required charging banks a flat-rate premium while extending protection enormous efforts on the part of the Federal Reserve Banks and to uninsured depositors, the plan calls for risk-based depository institutions alike. To assist institutions to prepare for insurance premiums. the impending changes, the Chicago Reserve Bank mounted an Even with this change, the Chicago Reserve Bank extensive educational campaign. Two series of seminars were proposal calls for further market discipline to be provided by conducted across the District, reaching more than 8,000 individuals requiring banks to issue a special form of subordinated debt. at 85 different sessions. And as the Bank reached out, it also 6 focused on the internal operational changes necessary to handle the anticipated return item volume increases while meeting much earlier processing deadlines. As expected, the increase in return item volumes was information between District financial institutions and their local Federal Reserve Bank offices. Employing personal computers and software developed by the Federal Reserve, the new system is more flexible and more dramatic for the Chicago Reserve Bank as well as for the Federal efficient than its predecessors and has greater capacity. Dial-PC Reserve System. In the Seventh District, return volume in the connections are already providing institutions with funds transfers, fourth quarter of 1988 increased by 36 percent compared to the check return notifications, Enhanced Money Position, ACH data- fourth quarter of 1987. With the initial challenge met, the Bank base returns, and Treasury tax and loan call notices, with other turned toward the refinements that will be needed to meet addi- services to be added in 1989. tional EFA requirements taking effect in 1990. Shaping the future with a "new" building Shaping the future through new electronic networks Another important innovation in 1988 was the completion Certainly the most visible changes at the Bank during 1988 related to the complete renovation of its headquarters, meant of the Seventh District Network, following more than four years of to create a facility that will serve the Bank's needs well into the planning and development. The network is a general purpose data next century. communications facility for transmitting information between Federal Reserve offices within the Seventh District and the The renovation project, now in its final stages, has essentially given the Bank a new building. A 1922 structure has been customers of each office. Rather totally transformed into a modern, than an addition to previously efficient, and pleasant work existing systems, it is a completely environment complete with new new network tailored to meet the computer-controlled heating, business needs of the various ventilating, and air-conditioning offices of the Chicago Reserve facilities. The redesign of the Bank and their customers well building provides for more efficient into the next decade in a cost- work flows and movement of effective manner. people—improvements that are Another state-of-the-art innovation of 1988 was the comple- most obvious in the operations areas such as check processing. tion of the Dial-PC connection. In Moved to its new facilities 1988 nearly 600 institutions in the in March 1988, the check depart- Seventh District converted their ment has been redesigned to existing computer terminal con- accommodate the increased check nections to the Federal Reserve's volumes handled by the Bank. network. These new connections Check receiving, the reader/sorter are designed to carry Federal Reserve services in support of the payments system, and to disseminate Dial-PCs that now connect customers to the Bank provide the vital link for expanding service in the future. machines, and return items have all been located to accommodate innovations reflect the Bank's commitment to public access. the work flow for fast, efficient handling of all items. Most notable is the first floor Visitors Center that will serve to Other innovative aspects of the building's redesign enhance the Bank's interaction with the community. The Center include bright, open work spaces surrounding internal atriums, and consists of a 65-seat auditorium and an exhibit that highlights the floor layouts designed to bring the outside light into the Bank. role of the Bank and its importance in the economic life of the Work stations have been designed to accommodate computers and Seventh District. other equipment that help people be more efficient. As a result of all its efforts in 1988, the Bank should be While these building changes enhance efficiency and poised to effectively play that role well into the future. enable the Bank's employees to better serve customers, other V O L U M E O F O P E R A T I O N S DOLLAR AMOUNT 1988 1987 VOLUME 1988 1987 CHECK AND ELECTRONIC PAYMENTS Checks, NOWs, and share drafts processed Fine sort and packaged checks handled U.S. government checks processed Automated clearinghouse (ACH) items processed Transfers of funds 1.1 trillion 1.1 trillion 2.0 billion 198.7 billion 150.6 billion 406.4 million 327.9 million 2.0 billion 52.1 billion 52.4 billion 59.3 million 59.8 million 969.6 billion 750.9 billion 211.1 million 146.1 million 25.7 trillion 23.0 trillion 10.4 million 9.7 million 21.8 billion 21.0 billion 1.9 billion 1.9 billion CASH OPERATIONS Currency received and counted Unfit currency withdrawn Coin received and processed 4.4 billion 589.0 million 3.2 billion 540.1 million 513.8 million 4.3 billion 476.6 million 4.0 billion SECURITIES SERVICES FOR DEPOSITORY INSTITUTIONS Safekeeping balance December 31: 14.1 billion 13.6 billion 215.6 billion 192.7 billion Purchase and sale 3.6 billion 3.9 billion 22.2 thousand 19.8 thousand Collection of securities and other noncash items 1.2 billion 1.4 billion 251.1 thousand 276.5 thousand 4.6 billion 4.7 billion 2,195 2,353 4.2 billion 3.6 billion 26.5 million 30.3 million Definitive securities Book entry securities — — — — LOANS TO DEPOSITORY INSTITUTIONS Total loans made SERVICES TO U.S. TREASURY AND GOVERNMENT AGENCIES Issues, redemptions and exchanges: U.S. savings bonds Definitive government securities 1.2 billion 1.7 billion 100.5 thousand 144.1 thousand Book entry government securities 2.7 trillion 2.4 trillion 1.2 million 1.2 million Government coupons paid 140.8 million 172.1 million 137.0 thousand 195.0 thousand Federal tax deposits processed 107.4 billion 98.3 billion 863.5 thousand 877.7 thousand 1.4 billion 1.4 billion 312.4 million 295.0 million Food stamps received and processed 8 H I S T O R I C A L P E R S P E C T I V E S : T H E B A N K A T 7 5 O R I G I N S """"AnAct to provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes." - F e d e r a l Reserve Act, D e c e m b e r 23, 1913 Taking its cue from its always-confident president, Theodore Roosevelt, the United States anticipated another prosperous year in 1907. In the past decade, the country had begun to build the Panama Canal, defeated former worldpower Spain in a war, and was on its way to becoming the leading industrial nation in the world. The future looked bright. Optimism was also strong in the Midwest. The Chicago Tribune noted that 1906 had been the most prosperous year ever for the city, and confidently predicted that the volume of business would be even greater in 1907. [18]* For most of 1907, these predictions generally held true. By March, however, bankers were already concerned about their inability to meet the financial demands of the booming economy. James B. Forgan, president of First National Bank of Chicago and later a director of the Chicago Reserve Bank, wrote: "Money is scarce all over...the pressure on us has been so extraordinary...! am in daily terror of something giving way under the strain." [18] Eventually, something did give way. In October, the scarcity of money led to a panic in New York that spread through the rest of the country. Chicago's banks followed the lead of New York and suspended currency payments. As might be expected, depositors were angry. One irate letter to Forgan, signed only "A Small Depositor," stated that "unless the banks shall resume currency payments... so as to restore some feeling of confidence among the masses, there are apt to be such scenes of riot and bloodshed in this city as Chicago has not seen..." [18] Throughout the country the banking system ground to a halt. In five states, banks were closed by order of the governor. Every state in the country was forced to issue some form of emergency currency. [18] Eventually, the panic was halted through the efforts of J.P. Morgan and other leading bankers, but the damage had been done. The panic, which occurred in the midst of general prosperity, illustrated one indisputable fact—the U.S. banking system was not meeting the financial needs of the country. The system's shortcomings included two basic problems—an inelastic currency and immobile reserves. The supply of national bank note currency, which was tied to government bonds, changed in response to the bond market rather than the needs of American business. In addition, bank reserves were scattered throughout the country—a total of 50 different cities served as reserve depositories. Thus, even when reserves were sufficient, it was difficult to move the money where it was most needed. It was generally agreed that some form of central bank was needed. The controversy centered on how to structure the central bank. On one side the Progressive movement, which generally represented small businesses and the small town and farm population, was suspicious of concentrating too much power in the hands of bankers. Conservatives, representing the most powerful business and banking groups of the large Eastern cities, insisted on the need to avoid political interference in central banking. The first attempt to solve the problem, the Aldrich Plan, was rejected as too conservative. In 1912, Representative Carter Glass of Virginia initiated a second attempt. Working with Glass was H. Parker Willis, a former professor of economics who served as advisor to the House Committee on Banking and Finance. Glass and Willis worked through most of the year and finished a draft just prior to Woodrow Wilson's election as president in November 1912. A 1906 run on the Milwaukee Avenue State Bank in Chicago occurred when the bank's president fled to Tangiers after losing depositors' money in risky real estate ventures. Chicago Historical Society (DN 3927) In the view ofprogressives, bankers refused to submit to the ""bridle" of government control. ""Some Horses Just Fear a Bridle," by J. Darling, Des Moines Register Numbers in brackets refer to sources listed in the bibliography that appears on the inside back cover. 10 To their plan for a system of regional Reserve Banks, Wilson added an important balancing feature—a central board to coordinate the work of the regional banks. The central board, a public agency, would be appointed by the President and approved by the Senate. To supply the elastic currency required by the economy, the central bank would rediscount bank notes and issue a new national currency, Federal Reserve notes. National banks would be required to become members of the Federal Reserve System, while banks chartered by the state would have the option of not joining. many was its vagueness on certain key issues. Regarding the number of Reserve Banks, the Act called for no fewer than eight and no more than twelve. The question of each Bank's territory was left unanswered. An Organization Committee consisting of the comptroller of the currency, the secretary of agriculture, and the secretary of the treasury was given the unenviable task of resolving these issues. When the Committee visited Chicago as part of a nationwide tour, there was little doubt that the city would have a Reserve Bank. Instead the debate centered on the territory to be included in the Chicago Bank's district. Typically the Committee had encountered fairly partisan testimony; Chicago was no exception. Presenting the case for Chicago bankers, J.B. Forgan advocated putting all of Illinois, Indiana, Iowa, Michigan, and Wisconsin and even parts of Nebraska, Minnesota, and After months of effort and compromising, the bill was passed by Congress on December 23, 1913. The U.S. had a central bank. "The future is clear and bright with promise of the best things... We now know the port for which we are bound. " -Woodrow Wilson, on the opening of the Federal Reserve Banks Although many bankers had opposed the Federal Reserve Act, especially those in Chicago, the majority were resigned if not enthused about the new legislation. One prominent merchant in Chicago wrote, "During the past week, I have heard a number of bankers and business men discuss [the Act], and there seemed to be a unanimity of opinion that, while the act is not an ideal one, it is a great improvement upon the plan under which we are now working... it should be accepted in the hope... that the wrinkles, as they manifest themselves, will be ironed out by future legislation." [18] Perhaps one of the reasons the Act was palatable for Ohio in the Chicago Reserve district. Secretary of the Treasury William G. McAdoo, who earlier had listened to New York lay claim to nearly half of the country's banking resources, noted that there would be very little left for the other Fed Banks if New York and Chicago were accommodated. Forgan, never shy in presenting his view, responded, "That is the difficult problem that you gentlemen have got to solve... From one point of view, you know, if we are just going to look upon it territorially we are really the center and New York is on the circumference of the circle." [18] After the Organization Committee left Chicago, interest in the new central banking system quickly waned. There was little excitement in the Midwest when it was announced that there would be twelve districts and that the Chicago Bank's territory would consist of northern Illinois and Indiana, southern Wisconsin, all of Iowa Carter Glass Historical Pictures Service, Chicago President Woodrow Wilson's strong support of the Federal Reserve Act helped to overcome objections from both progressives and conservatives. President Woodrow Wilson signed the Federal Reserve Act on December 23, 1913, just a few hours after it was approved by the Senate. H. Parker Willis Historical Pictures Service, Chicago 11 proceeded quickly. Soon after the Organization Committee announced its decision, representatives from five Seventh District banks gathered on May 18,1914 for the formal signing of the Chicago Fed's organization certificate. As specified in the Federal Reserve Act, six of the Bank's nine directors were elected by member banks. The Federal Reserve Board appointed the other three directors, including C.H. Bosworth who served as chairman of the board and federal reserve agent. The appointment was in keeping with the Federal Reserve Act, which specified two and the lower peninsula of Michigan. This decision was supported by a poll in which 714 of the 861 banks in that area chose Chicago as its preferred Reserve Bank location. [16] (The only change in the Bank's district since then occurred when northern Wisconsin banks assigned to the Minneapolis Reserve Bank's territory petitioned to be moved to the Chicago district. The Federal Reserve Board allowed banks in 25 Wisconsin counties to shift to the Seventh District in October 1916.) The organization of the Chicago Reserve Bank A m o n g the many cago Fed in 1914 hopefuls who applied was a man William J e n n i n g s Bryan, from Illinois, all Republicans. doubted Bank response political to complain Bank's touched according interest chairman candidate Taft. were they they could not questioned Woodrow Theodore The firestorm and even debates in the in the matter waned affiliations should in an effort to settle conducted who voted in the 1912 presidential 2 voted for Republican Howard headlines Interestingly, the Bank's voted for Democrat Moose" newspaper off a minor political agreed that political affect appointments. employees replied that while because no one had been Eventually parties controversy, to senator 41 employees were Republicans, in newspaper U.S. Congress. involved declined opened for business on Monday, November 16,1914. One of the Bank's original employees later described the scene: "After less then three weeks of preparation... some place to hang your hat and coat—a few desks and stools... the message from Washington [arrived], 'All ready—get set' and Governor McDougal's happy smile and hearty handshake and then, We're off'—the roar of flashlights to the click of the newspaper cameras...." [7] While the Bank and its 41 employees were ready to carry out their appointed duties, exactly what these duties would be was to some extent unclear. The Bank's first annual report noted optimistically, if somewhat uncertainly, that the "various departments are now fully organized and equipped and in readiness for increased activities, whatever they may be." affiliation. The allegation that resulted State the Democratic Frank, officials from of The Bank Reserve that all employees give a definite about that moved J. Hamilton reporters that the Chicago Secretary Movement. a decision Chi- with a recommendation the Democratic and leader of the Progressive to hire the man, to work at the positions—governor, and chairman of the board and federal reserve agent. The framers of the Act seem to have intended that the federal reserve agent serve as the Bank's chief executive officer. A majority of the Bank's directors, however, decided that the governor, who would be their own appointee, should assume that role. The federal reserve agent, in the words of one of the directors, was to "have a minor position." [18] Having decided on this matter, the directors selected James B. McDougal as the Bank's first governor. (In 1935, the title of governor was changed to president.) The choice "was greeted with universal approval" according to a local news report. [18] Having served as head examiner for the Chicago Clearing House for the past eight years, McDougal was well-acquainted with Chicago bankers. He had also spent fourteen years with a commercial bank in Peoria and worked as an examiner with the Comptroller of the Currency. The Federal Reserve Bank of Chicago, along with the other eleven Fed Banks, Wilson, Roosevelt, as the not the a poll of the 26 election: 12 12s u p p o r t e d " ." B u l l and William incident, to T h e G r o w t h o f C h i c a g o B a n k s , helped to "emphasize Chicago the determination Reserve Bank of the to keep its skirts entirely free from politics. " Federal Reserve Board, 1914. Seated left to right: C.S. Hamlin, governor; W. G. McAdoo, secretary of the treasury and chairman; F.A. Delano, vice governor. Standing left to right: P.M. Warburg; J.S. Williams, comptroller of the currency; W.P. Harding; and A.C. Miller. 12 The Bank's first deputy governor, Charles R. McKay, played a key role in developing the Federal Reserve System's nationwide clearing system. The system, he wrote in 1920, is "a modern piece of banking machinery made in America... especially designed to redeem expeditiously the tremendous volume of checks...." The annual salaries of the Bank's 41 original employees ranged from $20,000 for GovernorJames McDougal to $300 for bell boy John Lee. 1 9 1 5 - 1 9 3 9 " The development of the checkcollection function has proved the most difficult problem confronting the management of the bank." -1916 Annual Report, Federal Reserve Bank of Chicago Following the relative excitement of the opening, the Chicago Fed spent its first few months feeling its way in its new role as a Reserve Bank. As specified in the Federal Reserve Act, the Bank issued Federal Reserve currency and rediscounted some bank notes. In general, however, the Bank was calm. Years later, the Bank's only switchboard operator reminisced of bringing sewing to work because there were only six calls a day. [7] A more formal indication of the Bank's relatively calm operations is contained in the 1915 annual report, which notes that While the Chicago Fed offered limited clearing services on the first day it opened, it concentrated on developing an intra-district collection system in which checks would be accepted without an exchange fee, also known as accepting at par. In April 1915, member banks were notified that a voluntary collection system would go into effect on June 10th. Banks were free to join the system or ignore it as they chose. In general, they chose to ignore it. During the one and only year of the voluntary operation, only 114 of the District's 980 member banks participated. The voluntary system had, in the words of the Bank's 1916 annual report, "proved unsatisfactory." Having tried a voluntary approach, the Federal Reserve instituted a compulsory system for member banks in July 1916. All member banks were required to accept at par a check drawn upon themselves and presented for payment by a Fed Bank. To discourage exchange fees, the Fed Banks distributed a list of banks that accepted at par. "Notwithstanding the relatively small demands... for either credit or currency... the system fully demonstrated its worth, inspiring confidence and banishing fear, and forestalling panic from the mere fact of its existence." With its currency and rediscounting functions at a low ebb, the Bank focused on developing a check collection system-one of the responsibilities that fell under the vague category of "other purposes" in the preamble of the Federal Reserve Act. Throughout its history the U.S. banking system had been hampered by an inefficient collection process. Although local clearinghouses operated efficiently in some large cities, much of the country was saddled with exchange fees and indirect routing designed to avoid these charges. Recognizing these flaws, the Federal Reserve Act gave the Fed authority to provide check clearing services. A check collection plan faced one basic problem: many bankers had come to depend on exchange fees as a regular source of income and were reluctant to make changes. 13 The effect of the new system was immediate. The Bank's check volumes rose from 8,900 items a month under the old system to 18,000 checks a day through the rest of 1916. [16] The trend toward par collection received a boost in 1918 when the Fed Banks began offering collection services free of charge to all banks on the "par list." By 1920, the Bank's original seven-man Check Department had 350 employees processing 60 million checks annually. The number of District banks collecting at par grew quickly. Over 3,300 banks appeared on the par list in January 1918. Four years later, every bank in the District accepted at par. Nationwide, all but 1,755 of the country's 30,523 banks accepted at par in 1921. [17] Through the rest of the 1920s opposition began to build as opposing bankers fought par collection through the courts or state legislatures. In some cases, banks took more direct methods such as stamping on blank checks, "Not valid if presented through Federal Reserve." [25] This resistance was mainly centered One of the first tasks facing the Chicago Reserve Bank was coordinating World War I bond drives. The Bank organized the District's Liberty Loan sales organization which included approximately 300,000 volunteer workers. The Illinois Division of the Liberty Loan Volunteers in 1917 is pictured above. in the Southern and Western sections of the country. In the Seventh District, bankers generally accepted the plan, with some misgivings, as being good for business. [16] In spite of some lingering resistance, par collection was established and eventually became standard practice. "Winning the war is the thing uppermost in our minds... the Seventh District will be found ready, as it has been, to sacrifice to the utmost of its abundance and of its best blood. " - 1 9 1 7 Annual Report, Federal Reserve Bank of Chicago Having opened just three months after the outbreak of the war in Europe, the Chicago Fed did not have to wait long to assume its second major responsibility. When the U.S. declared war on Germany in April 1917, the Reserve Banks were authorized to handle the financial operations associated with the war, including the sale of Liberty bonds. The nationwide goal of the first Liberty people must be made to realize "that they are not in normal conditions, but are going into the ordeal by fire." The newspaper added that Americans "must meet the test with their money and with their bodies. The nation wants, now, the people's money. It is a test of patriotism." Efforts intensified: Loan campaign was to sell $2 billion in bonds—a staggering amount of money at the time. According to Financing an Empire—Banking in Illinois, even the largest bankers were "stunned" and at first thought that "such a stupendous amount could never be raised." Nevertheless, the campaign began in earnest in the Seventh District. Additional quarters were rented by the Bank, committees of leading citizens were appointed, and publicity efforts began. The initial response, however, was not promising. To the people in the District the war must have seemed a distant and not very real event. Noting the lack of interest, the Chicago Tribune fretted that the American 14 a great parade of bond salesmen marched through the city and the "Four Minute Men"—a small army of speakers who gave short talks on bonds—were dispatched wherever an audience could be gathered. On June 10th, with only five days left in the campaign, the District had subscribed for slightly more than half of its $298 million quota. In response, the city of Chicago ordered that churches and schools ring their bells every day to remind citizens of the cause. Finally, in the last few days of the campaign, enthusiasm began to build and subscriptions rapidly increased. By June 15th, the aggregate sales were $357 million and the District had easily exceeded its quota. Four more Liberty Loan campaigns were undertaken in the next two years. Bond sales for the District totalled $3.29 billion—the largest subscription per person in any of the Federal Reserve Districts. The Illinois portion of the District alone accounted for $1.45 billion, more than the country's total bonded debt in 1916. [17] As its responsibilities increased, the Chicago Reserve Bank rapidly outgrew its original rented quarters in the Rector Building. The Bank began to construct a new building in 1918, a project that was completed four years later at a cost of $7 million. The Detroit Branch underwent a similar process after it opened in 1918. Branch employees moved from rented quarters to a new three-story building in 1927. For the Chicago Fed, which was responsible for organizing the bond effort as well as processing the securities, the immediate impact of the Liberty Loan campaigns was tremendous. The war effort had a more important longterm effect, however. In the spring of 1915, the Fed Banks were, in the blunt opinion of J.B. Forgan, "not of much benefit anywhere." [18] The Liberty Loan campaign accelerated the Fed's integration into the banking system, and by October 1917 Forgan wrote, "You must get in the habit of believing and acting on the fact that your bank is part and parcel of the Federal Reserve System... The stronger the Federal Reserve banks are, the stronger will the [banking] system be." [18] "The building is simple in outline and severely plain in its general effect, the aim of the design being to produce an impression of dignity and strength." -1920 Annual Report, Federal Reserve Bank of Chicago It was clear that new quarters were needed. Accordingly, the Chicago Fed purchased a 165 x 160-foot lot on LaSalle Street extending from Quincy Street to Jackson Boulevard. The 1918 annual report noted that the property was not only "the most desirable site" in the city for the Bank's purposes, but was "acquired at an exceedingly low cost, the purchase price being $2,936,149." Having purchased property, the Bank's directors hired the architectural firm of Graham, Anderson, Probst, and White to design the building. The firm, which later designed the Continental Bank Building across the street from the Chicago Fed, also built such Chicago landmarks as the Wrigley Building, the Due to the sudden growth of its burgeoning check and fiscal agent duties, the Bank quickly found itself outgrowing its quarters. Initially the Bank opened for business with 41 employees on two floors of the Rector Building at Clark and Monroe. By 1919, the Bank's 1,200 employees were scattered throughout the Loop. In some cases stenographers had to cross the street from one building to another and climb three flights of stairs to take dictation. Other problems cropped up: one building was overrun with rats, another had heating deficiencies. Years later, two of the Bank's original employees wrote of trying to keep warm by resorting to the Dickensian solution of wrapping currency sacks around their feet. [7] 15 Civic Opera, and the Merchandise Mart. Beset by labor and material shortages, the project was delayed for several years. Construction was eventually completed in 1922 at a cost of $7 million. The 1920 annual report depicted the building as "classic in style, fully interpreted to harmonize with modern conditions." The report added that in "line with modern ideas very comprehensive arrangements have been included for the general welfare of the entire working staff. An assembly room, dining rooms, rest rooms... are some of the more important features." As the Bank began planning a new building in Chicago, there was increasing interest in establishing a Branch in Detroit. Fed member banks in The Federal Reserve's traced to 1918 Chicago Fed. the Federal The evolution Reserve made payments the Gold Settlement check collection Federal Reserve system. when Fund as Fed Banks large amounts the Reserve Banks of the currency telegraphed the Board. With the Gold Settlement Fed began to encourage through Fund Eventually, in place, the use of telegraph price incentives. the cost of telegraphic transfers. at the credits and debits on to shipping To transfer funds, bankers system can be of the system began in 1915 to each other through books as opposed or gold. wire transfer established part of its nationwide fund's modern to the leased wire system headquartered transfers the Chicago transfers among At first, the Chicago Fed and increased the Bank the price of began offering cut mail telegraphs at no cost. As volumes install normal began to rise, the Federal Reserve a leased wire system rather commercial of the new system, eral Reserve Banks. in June 1918 month. Within system. which decided The Chicago Fed was given connected the Board averaged 30 years, more than the lower peninsula of Michigan had to clear checks and obtain rediscounts through the Chicago Bank, a fairly inefficient process given the geography involved. Frustrated by these time delays, Michigan b a n k e r s m e t in L a n s i n g in 1 9 1 7 in an effort to build enthusiasm for locating a Branch in Detroit. As the second largest industrial area in the Seventh District, Detroit was a logical candidate and the Chicago Fed board of directors voted in November 1917 to establish a Branch. The Branch opened for business on March 18,1918. The following year, the Bank's annual report stated that the Branch "justified in every way its creation." As expected, the Branch eliminated a delay of one or two days in check clearing, rediscounting, and other operations. By 1920, the Branch began to exercise all of the functions of a Reserve Bank except for note issuance and a few minor tasks. 20,000 charge and all the Fed- The leased wire system began and quickly ally were sent via the leased wire to than send wires over the operations messages 1 million a messages annu- system. "The problem of sion on the one hand inflation other is yet to be the System was created, Federal Reserve Board in or making loans to Washington, D.C. and the Fed rediscounting, member banks, was the chief Banks began to sort and anameans of affecting credit. It lyze the data, an effort piowas not until 1921, when the neered by the Chicago Fed. Reserve Banks began to buy In 1918, the Chicago Reserve and sell government securities Bank established the Statistical to build their earnings, that the and Analytical Department to potential effect of open market compile statistical information operations was fully realized. for the Federal Reserve Board In 1923, the Federal and member banks. The Bank Reserve Board established the had already begun publishing Federal Open Market InvestBusiness Conditions, a monthment Committee comprised of ly review of the Seventh Disthe governors of the Chicago trict economy, in October 1917. Fed and four other Reserve Over the next few years, the Banks. Operating under the Chicago Fed began collecting a supervision of the Board, the condensed statement of condiCommittee was instructed to tion from selected member conduct operations "with the banks and started a "Business primary regard for the accomReporting Service" that gathmodation of commerce and ered data from producers and business and to the effect of merchants. As the Reserve these purchases and sales on Banks refined their research the general credit situation." capabilities, the Federal ReEven as open market serve had a prerequisite for a operations became increascentralized policy—a flow of ingly centralized, the role of the information from each section Reserve Banks in setting the of the U.S. to incorporate into discount rate was still unclear. an overall policy. Under the Federal Reserve Act, As the Fed Banks inthe Reserve Banks set the creased their research efforts, regional discount rate subject they became increasingly to the "review and determinaaware of a potentially powerful tion" of the Federal Reserve new monetary policy tool— Board. An early controversy open market operations. When differentiat- ing between necessary dangerous An early ill-fated venture in show business by the Bank was a 1919 production entitled "A Trip to Jazzland. " Described as a "musical mixture of maids, mirth, and melody," the show was staged by the Bank's employee organization, the Federal Reserve Club. Unfortunately, in the view of GovernorJames McDougal, the musical featured too many maids and not enough melody. The Chicago Evening American described the scene when a short-skirted chorus line danced on the stage singing "Who Wants a Baby ": "Out danced the shapely limbs. Up rose Mr. McDougal. 'Stop!'cried Mr. McDougal. 'Stop that! I won't stand for this sort of costume.' " The number was halted and the chorus line later reappeared in more decorous gingham gowns and sun bonnets. McDougal, concluded the Evening American, might be described as the "man who put the reserve into the Federal Reserve Club chorus. " expanand on the solved. -1917 Annual Report, Federal Reserve Bank of Chicago Having proved its worth in its World War I financing efforts, and with the check collection system well in hand, the Fed began to delve gingerly into the relatively unexplored terrain of monetary policy. Throughout the 1920s, the Federal Reserve moved toward increased centralization and coordination in monetary policy. The concept of 12 regional credit policies based on the needs of each district was slowly replaced by a coordinated policy that balanced the needs of each district. An important first step was in the area of research and statistical analysis. In the early 1900s, due in part to the advent of the federal corporate income tax, statistical information on business trends was becoming increasingly available. The 16 "The boys in the trenches trained and fought for results and got them and covered themselves with glory... But these boys and girls before me—do they know that we know that they fought the good fight too... ten, twelve, fifteen, even eighteen hours, day after day without rest, without bands, without drums... I want them each and everyone to know this, that the successful operation of this institution in the trying days and nights through which we have passed is due entirely to those hearts and heads and hands, that without their wholehearted individual efforts and their teamwork, it would not have been possible to accomplish anything, James McDougal Bank Currency Department picnic, 1920 involving the Chicago Reserve Bank highlighted the issue. The incident initially involved Chicago Reserve Bank Governor McDougal and Benjamin Strong, the charismatic head of the New York Reserve Bank, a n d p r o v i d e d a n interesting contrast in styles as well as philosophy. Known as the "Quiet Man of LaSalle Street," McDougal had a reputation for listening a lot and talking very little. Well respected in the financial community, his "integrity and financial sagacity was a byword among Chicago bankers," according to the Chicago Tribune. Strong, one of the leading figures in the Federal Reserve System, was described by contemporaries as an outgoing personality who was a charming conversationalist and a man of unusually strong intellect. [2] In 1927, Strong was leading an effort to reduce the discount rate. Strong's outlook was a global one—he favored an easy money policy to aid the European financial position. McDougal, traditionally a conservative in credit policies, opposed the move Still, McDougal and the Bank's board held firm. The discussion erupted into a controversy when the Federal Reserve Board ordered the Bank to reduce its rate on September 6th. The Board's action aroused bitter controversy within the System and a fair amount of publicity outside the System. Two of the strongest dissenters against the Board's action were Carter Glass and H. Parker Willis. Strong himself opposed the move and tried to prevent it. [5] According to the New York Herald Tribune, the controversy centered on "the long smouldering question of whether in matters of fundamental policy the several regional reserve banks of the system are to be granted self determination...." The Chicago Bank complied with the rate reduction, but also announced that it would seek an opinion from the U.S. Attorney General as to the legality of the Board's action. Later, however, the Bank had second thoughts, and the convenient resignation of one of the Board members supporting the forced discount rate reduction helped to ease the as did several other Reserve Banks. Strong wrote to McDougal in August 1927 exhorting the Chicago Bank to join a Systemwide effort to ease credit. McDougal was not persuaded. In a letter to Strong, he wrote "It is understood that the governing factor... is the international situation, and it seems to me that the desired result has already been attained through the reduction in your rate." As far as uniformity among the Reserve Banks was concerned, McDougal wrote "up to the present time we are not convinced as to the necessity of having a uniform rate in all districts." Strong replied, "My dear Mac: I have read that austere letter of yours... and after finishing it felt as though I were sitting in an unheated church in midwinter, somewhere in Alaska." According to Strong, lowering the discount rate "is neither a New York question nor a Chicago question nor a district question but a national question bearing upon our markets in Europe, consequently an international question." 18 controversy. The issue was not resolved, but the trend toward centralization had received additional impetus. "The year immediately preceding was characterized by an unprecedented orgy of extravagance, a mania for speculation..." -1920 Annual Report, Federal Reserve Board As the Federal Reserve refined its monetary policy efforts, the U.S. experienced a giddy period of industrial growth and high employment through most of the 1920s. In keeping with the confidence of the times, many felt that financial panics had become a thing of the past. As late as 1931, the Encyclopedia of Banking and Finance stated "this country is now thought to be panic proof." [20] At the same time, many worried about the extremely high levels of speculative spending. In February 1929 the Federal Reserve Board, as part of its unsuccessful campaign to curtail speculation, decried the "excessive amounts of the country's credit absorbed in speculative security loans." [24] Soon after that statement the stock market began to sour. The plummeting market shook the confidence of the United States. In Chicago, the glum attitude was reflected on October 22nd as a band marched up LaSalle Street to celebrate the laying of the cornerstone of the new Board of Trade Building. Many listeners, according to the Chicago Tribune, thought the band should have played a funeral dirge. [18] On October 29th, the stock market crashed. The Fed responded by easing credit through open market operations and reductions in the discount rate, a policy it continued through the first half of 1931. Nevertheless, the economic decline continued. By mid-1931, a financial crisis abroad added momentum to the Depression. England abandoned the gold standard in September 1931, a move that shook the international financial community. Fears of a dollar devaluation triggered a flow of gold out of the U.S. The Federal Reserve reacted in traditional central bank fashion by tightening credit, the classic method of slowing the flight of gold. Contributing to the Fed's decision was a requirement of the Federal Reserve Act that gold or eligible paper provide backing for Federal Reserve currency. With eligible paper scarce, the need for gold as collateral increased. In addition, many simply thought that tighter credit was needed. Many commercial banks, understandably skittish after the events of the past two years, kept excess reserves as a cushion, a move that helped convince the Fed that some tightening was needed. [14] In Chicago, the Commercial and Financial Chronicle reported that funds were so plentiful that bankers reversed their earlier pleas for liquidity and were in open revolt against the easy money policies of the Fed. [18] the nationwide trend. The Bank's annual report noted that "in 1931, as in the preceding year, the Seventh District shared in the world-wide decline in industrial and business activity." The dropping agricultural prices and "unusual number" of bank suspensions fueled the District's sharp decline. Spurred by the economic problems, Congress passed the Glass/Steagall Act of 1932, which enabled the Fed to use government securities as backing for its notes. During the first nine months of 1932, the Reserve Banks bought an unprecedented $1 billion of securities, but this additional liquidity was quickly absorbed by the parched banking system. [24] The economy continued to decline and industrial activity reached a low point in July 1932. Banks began to feel extreme pressure. In addition to growing loan defaults, the country experienced a wave of currency hoarding. State and local governments began to announce bank holidays. In the Seventh District, a number of local holidays were announced in cities such as Rock Island, The tightening of credit, however, put increased pressure on the economy. The Depression deepened and unemployment rose to 11 million. The Seventh District reflected 19 Illinois, Muscatine, Iowa, and Huntington, Indiana. [18] The piecemeal approach to bank closings accelerated the deposit withdrawals. As pressures increased, the two dominant banks in Detroit were facing collapse by February 1933. Chicago Fed Governor McDougal, leading commercial bankers, U.S. Treasury officials, representatives of the Reconstruction Finance Corporation (RFC), and others met to try to resolve the crisis. After studying the banks' books, the RFC declined to provide the large loan necessary to keep the banks open. Private corporations also refused. With no solution in hand, the governor of Michigan declared a statewide bank holiday on Tuesday, February 14th. The closing was a severe shock. During the rest of the week, the currency drain on the Chicago Fed was three times greater than for the same period in 1932. [18] During the first three days of March panic reached a peak throughout the U.S. as bank customers withdrew huge amounts of deposits. On March 3rd, the evening before Despite the depressed conditions in the early 1930s, many were still concerned about the dangers of inflation. Copyrighted, Chicago Tribune Company, all rights reserved, used with permission. A listing of overdue loans contained in a 1931 Chicago Fed examination of a state bank. During 1931, 631 Seventh District banks suspended operations. Only 102 of these banks were members of the Federal Reserve System. "I can assure you it is safer to keep your money in a reopened bank than under a mattress. " -Franklin D. Roosevelt, March 12, 1933 Roosevelt took quick action once he assumed office. Under the Emergency Banking Act of 1933, banks were reviewed by regulators and licensed to reopen if they were solvent. Confidence was restored and the crisis passed. The cost was high—bank suspensions soared in the early 1930s, reaching 4,000 in 1933. Approximately 30 percent of the suspensions were in the hard-hit Seventh District. [9] With the banking crisis in hand, Congress took on the task of reforming the financial system. Banks were restricted from engaging in securities activities and prohibited from offering interest on demand deposits. The Federal Deposit Insurance Corporation was created to protect small depositors against loss. The Federal Reserve was given a powerful new monetary policy tool—the authority to change member banks' reserve requirements. National unemployment was estimated to be as high as 25 percent during the depths of the Great Depression. the inauguration of Franklin Roosevelt, the governors of Illinois and New York declared a bank holiday. The executive committee of the Chicago Fed's board of directors met at 10:30 p.m. that night and passed the resolution that the "Federal Reserve Board should urge upon the President of the United States that he immediately declare a bank holiday... in order to give the banks and the governmental authorities sufficient time and an opportunity to provide the necessary measures for the protection of the public interest..." The nation's banking system was effectively shut down. Although a host of factors caused the banking collapse, many beyond the reach of the Federal Reserve, the fact remained that the Fed was unable to head off the very catastrophe it had been established to prevent. In addition to being hindered by out-ofdate legislation, the Fed did not yet have a full understanding of the capabilities and responsibilities of a central bank. Throughout the crisis, the Federal Reserve's progress on the monetary policy learning curve was a step behind the sequence of events. 20 The Fed also received permanent authority to lend to member banks on the basis of "satisfactory" assets. Previously, the Fed was prevented from lending to institutions that did not have eligible paper to collateralize the loan. The legislation also capped the Federal Reserve's trend toward centralization by creating the Federal Open Market Committee (FOMC) to conduct the System's open market operations. This committee, consisting of the Board and five Reserve Bank presidents, came to be the System's chief monetary policymaking body. Despite the legislation and the New Deal efforts to stimulate spending, the downswing continued through the 1930s. It was not until preparations for World War II began that the country completely shook off the Depression. Although the Federal Reserve now had its monetary policy tools in hand, and a better understanding of how to use them, fiscal policy dominated the scene for the next ten years. As in 1917, a world war was to absorb the Fed's attention for the next several years. 1 9 4 0 - 1 9 6 4 "Our armed forces now are fighting on all the seas and on many battlefields... the amount of money to be raised has reached tremendous proportions." -HenryMorgenthauJr., Secretary of the Treasury, April 1942 Suddenly thrust into the second World War on December 7, 1941, the U.S. girded itself for a major financing effort. One day after the attack on Pearl Harbor, the Board of Governors announced that it was "prepared to use its powers to assure that an ample supply of funds is available at all times for financing the war effort...." [9] Once again, the Chicago Fed found itself responsible for coordinating the Seventh District's bond drives. The Bank's recently appointed president Clifford "Hap" Young was designated chairman of the regional War Finance Committee. Volunteers were recruited, additional quarters rented and new employees hired. Unlike the first World War, the Bank did not encounter any initial lethargy. The "aroused American public," according to the Bank's monthly business review, flocked to buy savings bonds after Pearl Harbor. The first bond drive was a huge success raising $13 billion nationwide—$4 billion more than originally targeted. It was only a beginning. "Millions more must take part in payroll savings plans and must invest hundreds of millions if we are to do our job," Secretary of the Treasury Henry Morgenthau declared in 1941. "Our plans at the Treasury for financing war are based upon the belief that the American people will want to assume a big share of the cost of the war of their own free will." [9] Once again, the war effort had a tremendous effect on the Chicago Fed's operations. About 1,500 Chicago Fed employees—one-third of the Bank's staff—were involved in war financing activities. The Chicago office alone handled 50 million securities worth $24 billion or $3 billion more than the entire amount raised nationwide in the first World War. But as the Fed concentrated on the war effort, it assumed a passive role in monetary policy. At the onset of the war, the Board of Governors announced that it would "exert its influence toward maintaining conditions in the United States Government security market that are satisfactory from the standpoint of the Government's requirements." Essentially, this meant that the Federal Reserve pegged interest rates on Treasury securities. The Federal Reserve Bulletin noted in February 1943 that the "policy of the Treasury and of the Federal Reserve System has been directed toward the stabilization of prices and yields of marketable securities. Investorsknow that prices and yields are stabilized and that they will obtain no higher yields by deferring purchases...." As it turned out, the American people were more than willing to assume a big share of the cost. The U.S. Treasury held eight war loan drives that raised a total of $157 billion. In each drive, the District and the nation as a whole oversubscribed, and the World War I total of $21 billion in Liberty bonds was dwarfed. Chicago Reserve Bank President Clifford "Hap" Young coordinated the Seventh District's World War II bond drives. Young (second from the right) is pictured here with the Bank's "Liberty Fleet." 21 To maintain this stability, the Fed pledged to buy Treasury securities at a predetermined rate. Member banks that wished to acquire reserves usually sold Treasury bills to Reserve Banks. In effect, the initiative of member banks determined the amount of reserves in the banking system. By the end of the war, the Fed had grown restive under these restrictions. In 1946 the Federal Reserve discontinued pegging interest rates for shortterm securities. In March 1951, after numerous conferences, the Federal Reserve and the Treasury announced a "Full Accord" on future policy. Bond prices and yields were gradually allowed to seek their own level as dictated by overall credit requirements. "The Midwest... has shared fully in the nation's vast growth and in the almost unbelievably high standard of living the American economy produces." -1955 Annual Report, Federal Reserve Bank of Chicago From left to right: Economists George Cloos and Robert Holland, President "Hap" Young, and Vice President and Director of Research George Mitchell discuss the economic outlook for 1952. Holland and Mitchell were later appointed as members of the Federal Reserve System's Board of Governors, while Cloos went on to serve as vice president in the Bank's Economic Research Department. Clifford from "Hap" Young, 1941 to 1956, central banker. Young the Chicago Reserve Bank's was the antithesis Nicknamed "Hap"- was described as "having examiner in small commercial with the state of Illinois, Fed in 1921. He was named tion Department playing a derivative moratorium. Young he held for 15 years. dominate personality of happypeople in at ease. " [10] banks and as a bank Young joined manager role in licensing president a genius for making the Chicago of the Bank in 1932 where he established a leading Although much of the responsibility for monetary policy was now centralized with the Board of Governors, the Reserve Banks were responsible for measuring and evaluating the economic trends in their district-acting as observation posts scattered throughout the nation. In the 1940s, Chicago Fed President Young began the practice of holding meetings of the Bank's board of directors outside of Chicago to help obtain a grass-roots "feel" for the Seventh District economy. As part of the same effort, he frequently traveled throughout the District to meet with farmers, bankers, and business leaders. "The day is past when a banker can sit at his desk and of the stereotypical s t u f f y all walks of life feel welcome and thoroughly After working At the time of the Treasury Accord, the Federal Reserve had its three monetary policy tools in hand—open market operations, reserve requirements, and the discount rate. Through the 1950s, the Fed generally followed a policy aimed at moderating the severity and duration of cyclical readjustments, a strategy described by Federal Reserve Chairman William McChesney Martin as "leaning against the wind." District was elected president Like J a m e s McDougal, Examina- his reputation banks during in 1941, a the Bank's in the years prior to World War II, set the tone of the Chicago Fed during his long tenure in by the position preYoung office. A post-war housing boom added impetus to the growing economy. Historical Pictures Service, Chicago 22 read reports," Young stated. "We have to get out and know what is happening." [10] Buoyed by a general policy of monetary and fiscal stimulus, the U.S. economy grew at a steady clip through most of the 1950s and early 1960s. The Seventh District prospered with the rest of the nation. The economy's vigor is reflected in the Bank's publications, which seemed to overflow with good news: "In the year 1950, the Seventh Federal Reserve District as well as the nation reached new peak levels of economic activity...A listing of the accomplishments of the American economy in 1953 becomes almost a monotonous recitation of new record highs...1959 ended on a resounding note of strength... Activity in the Seventh Federal Reserve District advanced along with the nation during 1963...." The District's economic growth was fueled by a healthy farm sector and heavy industry such as steel and autos. In its 1955 annual report—entitled "Growth and Prosperity in Five Midwest Cities"—the Bank noted that the District states accounted for 19 percent of the nation's personal income, one-fourth of factory output, and nearly one-fourth of farm income. "Like the stream from a hydrant with a broken valve the checks pour in—an endless, unstoppable flow. Each day '5 paper mountain must be attacked to clear the way for the avalanche that's sure to come tomorrow." -1952 Annual Report, Federal Reserve Bank of Chicago In step with the growing economy, the Bank's service volumes soared in the 1940s and 1950s, particularly in the check collection area. Nationwide, the number of checks written by consumers rose from 4 billion in 1940 to 13 billion by 1960. [13] As the largest check processor in the Federal Reserve System, the Bank began to feel increasing pressure. In 1941, the Chicago and Detroit offices together processed 271 million checks. By 1956, the Bank was operating 24 hours a day to clear more than half a billion items annually. Approximately 40 percent of the Bank's employees were engaged in clearing checks. The operation was, according to the Bank's annual report, the "world's largest check clearing installation." Complicating the Bank's task was the labor-intensive, time-consuming nature of check clearing. Although proof machines were introduced in the 1940s to help automate the process, each item had to be individually checked by an operator. The Federal Reserve System and commercial bankers began to explore the possibility of automating the process in the mid-1950s. The Federal Reserve and the American Bankers Association worked with bankers, check printers, and business machine manufacturers to find an answer. The eventual solution was MICR—magnetic ink character recognition that would enable machines to "read" and automatically process checks. In 1961, the Chicago Fed and four other Reserve Banks began to test automated checksorting equipment from different By the mid-1950s, the Bank required hundreds of semi-automated "proof machines " to sort half a billion checks annually. Patricia Dempski operates the first automated check processing machine at the Bank. The Chicago Fed was one offive Reserve Banks that tested automated equipment in 1961. 23 manufacturers. Heading the project at the Chicago Fed were Vice President Harry Schultz and Assistant Vice President Carl Bierbauer. The goal was to automatically process 1,500 checks a minute on each machine, but there were a variety of initial problems. Bierbauer, who went on to become a senior vice president at the Bank, recalls, "There were days and weeks when things didn't go right. It wasn't a case where we just brought in a machine and it worked." Despite setbacks, the Federal Reserve decided to introduce automated processing at all twelve Reserve Banks. "We had the new system, but in order to do anything about it we had to have checks that were magnetically encoded," Bierbauer said. "It was quite a job to sell to bankers the idea that we were going to have a brand new system and that they should start a program with their local check printers to encode checks." The new system also required check printers and business machine manufacturers to make substantial investments. "We went to them and asked them to believe that we've got something here and it will succeed if you cooperate." Over a number of years, the MICR system replaced the proof machines. By 1964,60 percent of the Bank's check volume was sorted on highspeed equipment. "It was hard work," Bierbauer said. "Progress was slow. But if we hadn't developed the system, I don't know how we would have handled all the checks. By the late 1960s we would have been in serious trouble. I'm sure that there were skeptics that thought it couldn't be done, but it's still running today." "Mr. Stevens has very definite and strong ideas on the matter of payment of interest on savings. He says he is not concerned with what the other banks do. The bank pays 1 % on regular savings and intends to continue on that basis.... This has been in usefor some time and Mr. Stevens says there will be no change." -Bank Relations Department interview with District banker, February 1956 Cushioned by the strong economy, banks prospered in the 1950s. The era was a pleasant change from the harrowing events of 1933. At that time, bankers' reputations had hit a low point and much of the Depression-era legislation was designed to prevent banks from engaging in "risky" activities. Surveying the scene in late 1933, H. Parker Willis described One of the Bank's original responsibilities was to issue Federal Reserve notes. 24 banking as "a discredited, hampered, and governmentally henpecked-occupation." [20] American Banker correspondent U.V. Wilcox wrote in his 1940 book—aptly entitled The Bankers Be Damned—that the "bankers of America are— collectively speaking—in the national doghouse... Bankers are now being trained in the rules of rigid supervision, wearing their stripes with only occasional murmurs of protest." [2] While the stripes of rigid supervision were sometimes confining, they also proved to be fairly comfortable. With lowcost deposits and strong demand for loans, the task of making money with money was relatively simple. It was later characterized as the "3-6-3 era" of banking: pay 3 percent on deposits, charge 6 percent on loans, and get to the golf course by 3 p.m. [2] The attitudes of the time are reflected in the interviews of District bankers conducted by the Chicago Fed's Bank Relations Department. A1953 report, for example, noted that the cashier at a bank in a small town in Michigan "could not understand why the other bank in town decided to raise its "Along with the other things that had to be done, we had to go out to the member banks and convince them to use magnetic ink on their checks. It was a hard sell; here was a brand new approach. There was a lot of concern on the part of bankers whether we had something real or were involving them in a fly-by-night idea. We also had to convince check printers and business machine manufacturers to invest in new equipment. We convinced them that this was not a halfhearted effort... we were committed... we could make it work. And it worked. As the years went by it just ran better and better and it s still running today." Carl Bierbauer interest rate from 1 percent to 2 percent on savings deposits...." The cashier added that he had "plenty" of loan applications and that he had to foreclose on only one loan in the past nine years. "The economic times were such that things were relatively calm," according to James R. Morrison, who served as a banker and a Federal Reserve examiner in the 1950s and 1960s and went on to head the Bank's Supervision and Regulation Department. "Competition is what drives all business and the competition then was very limited. People could bring money to banks or maybe an S&L and that was about it." Despite the tranquility of the banking system, the Bank's role in supervision and regulation continued to evolve as it had since 1914. In 1919, the Bank noted that the "growth of the Department of Examinations must of necessity be slow" with national banks under the jurisdiction of the Comptroller of the Currency and state banks under the purview of state banking departments. Field work was largely confined to cooperative examinations with state banking departments and inspections of state banks applying for membership in the Federal Reserve System. During the bank holiday of 1933 the Bank's Examination Department came to the forefront, playing a crucial role in reviewing and licensing District banks. Working with other regulators and the Reconstruction Finance Corporation, the Chicago Fed helped to reorganize or recapitalize hundreds of District banks. increasing competition. One development portending the heightened activity within the banking environment was the emergence of bank holding companies in the early 1950s. In 1956, Congress gave the Federal Reserve authority to oversee bank holding companies, a move that led to a major increase in the Fed's supervisory responsibilities. The pace of change would rapidly accelerate in the coming decades. From 1941 to 1964, only one member bank in the Seventh District failed. Throughout the nation, the number of failures was negligible. As the Bank celebrated its 50th anniversary in 1964, it could look back on 20 years of general economic prosperity and stable banking conditions. There were, however, stirrings of change as interest rates creeped upward and bankers grew restive in the face of During the 1940s and the 1950s, the Department continued to examine state member banks in cooperation with state banking authorities. During this period, virtually all state banks were gathered under the federal supervisory umbrella. State member banks were regulated by the Fed, while nonmembers were overseen by the FDIC if they obtained deposit insurance. By the end of the 1950s, banks were supervised by a comprehensive, albeit confusing, federal regulatory structure. A n undesirable byproduct was the cramped quarters of the Bank's at both Chicago move that was "typical of economic according 1953 to the Bank's completed eight-story annex annual an addition and Detroit. In a in Michigan, " to its original tripled the Branch's bank building, growth the 1950s. To provide remaining working basement on a similar project in 195 7. which occupied approximately Bank Examiners For the - Federal Reserve Bank of Chicago Chicago Reserve Bank examiners in 1955. President "Hap" Young is seated in the front row, fourth from the left. Seated at his left is Charles J. Scanlon, who served as the Bank's president from 1962 to 1970. Soft drinks were the beverage of choice at an employee party in 1952. 26 inadequate of the lot. At the same time, a The new addition 50th anniversary throughout was completed celebration in the on three-story the half- in time for 1964. onethrough more space, the Bank purchased and a first floor were constructed block area. Bank's one-half The space. land on the block and built a 16-story addition the southern in 1927 building. half of a city block, had grown increasingly The legislation of the 1930s, combined with favorable economic conditions and the cautious attitudes of bankers and regulators, made bank failures a virtual anachronism. operations report, the Detroit Branch The Chicago office embarked The original expanding the By the late 1960s, inflation and interest rates had begun to creep upward. 1 9 6 5 - 1 9 8 8 "In July 1965, the President announced a step-up in mili- tary operations... it became clear that a greatly expanded military effort was being superimposed on a booming private economy." -1967 Annual Report, Federal Reserve Bank of Chicago For approximately two decades, the Federal Reserve Bank of Chicago had enjoyed a period of general stability. By the mid-1960s, however, there were indications of change. In 1966, the Bank's annual report warned that economic developments in 1967 were "not likely to follow a classic pattern" because a "war effort involving the expenditure of many billions of dollars is taking a growing share of the nation's resources of men and materials." By the end of 1968, the Bank reported that "most interest rates were at a new high in the experience of today's generation." Constrained by ceilings imposed under Regulation Q, bankers watched helplessly as deposits flowed to competitors that provided higher yields. Seventh District bankers tried to respond to the increased competition. At the end of the decade, approximately 74 percent of District banks were paying the 4 percent maximum rate for savings deposits, according to a 1969 Chicago Fed survey. Many banks changed from quarterly computation of interest to daily or constant compounding, and offered noninterest extras such as "instant" loan privileges. As interest rates increased, banks stepped up their efforts to avoid restrictions on their activities. While the Federal Reserve was responsible for overseeing multibank holding companies, enterprising bankers discovered that Congress neglected to include one-bank holding companies in the Fed's purview. By 1970 1,352 one-bank holding companies held more than one-third of the commercial bank assets in the U.S. Many of these companies engaged in nonfinancial activities ranging from agriculture to mining operations. In the five Seventh District states, 361 one-bank holding companies controlled 27 percent of the states' deposits. In 1970, Congress closed the loophole in the Bank Holding Company Act and the Chicago Fed became responsible for overseeing all District banking companies and ensuring that they engaged in activities "closely related to banking." The end of the 1960s also saw the beginning of the Federal Reserve's responsibility for consumer credit regulation. In 1969, Congress passed the Truth-in-Lending Act and gave the Federal Reserve responsibility for implementing the legislation. From this relatively simple beginning, there was a stampede of consumer credit legislation—13 separate acts were passed by Congress by the mid-1970s. "...the most significant bank- ing legislation before the Congress since the passage of the Federal Reserve Act in 1913." -Senator William A. Proxmire, 1980 27 As the U.S. entered the 1980s, the financial system faced a host of problems triggered by the higher and more volatile interest rates of the 1960s and 1970s. As interest rates increased, banks squirmed under the constraints of Depression-era legislation while new competitors invaded their traditional turf. At the s a m e t i m e , t h e Federal R e s e r v e found its ability to conduct monetary policy threatened as member banks fled the System to avoid the burden of holding noninterest-bearing reserves. In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act (MCA) in an attempt to resolve some of the dilemmas facing the financial services industry. To enable financial institutions to compete more effectively, the Act phased out deposit ceilings and authorized NOW accounts. The Act also addressed the Fed's membership problem by imposing reserve requirements on all depository institutions. At the same time, the MCA required the Fed Banks to price many of their services and offer them to all depository "The Monetary Control Act had an extraordinary impact on operations. It energized the organization and gave it a private-sector, bottom-line orientation. 1984 was the turning point. It was a crucial year. We set some volume objectives for 1983 and for a lot of reasons we didn't meet them. We had to cut costs. We also needed a very different type of organization. The old organization was very functionally oriented. Under the new organization, there was responsibility for an entire product—for all the services, all the inputs, and for delivery to the customer. We turned it around that year. Since '84, we haven't had a loss in priced services. " W h i l e many 1970s, of the financial the expectation of rising the Detroit offices were clearing automated machinery processing location ing regional enabled industry's predictions check volumes 1.24 billion the Bank their checks all the way to Chicago. A regional next two years, the Bank Indianapolis facilities 1988, were set up in each office to encourage the Chicago Fed's five regional in the 1960s By 1970, checks annually-double and the Chicago the volume sort checks, transporting The Bank the need for banks established to materialize was right on target. to quickly was often time-consuming. offices to eliminate failed in 1960. an item to a began to explore the idea of in Indiana, Iowa, and Wisconsin office was set up in Des Moines and Milwaukee offices. the use of "paperless" offices cleared nearly 2.5 billion While central establishto send in 1973; In addition, electronic and transfers. in the ACH In checks. In the early 1970s, the Chicago Reserve Bank coordinated the newlyestablished Interdistrict Transportation System (ITS), an air transport service that provides overnight delivery of checks. institutions. As one of a number of competitors in the marketplace, the Federal Reserve was to recover "in the long run" the costs of providing priced services. The MCA had an immediate effect on the Bank—the number of potential customers and institutions required to submit statistical data jumped from 904 member banks to approximately 7,000 banks, savings and loans, and credit unions. To help in the transition, the Bank turned to the private sector when it became time to select a new president in 1981. Silas Keehn, who had previously served as vice chairman of Mellon National Corporation and Mellon Bank, N.A. in Pittsburgh, and as chairman of Pullman Incorporated in Chicago, brought to the Chicago Fed the valuable perspective gained in the competitive marketplace. "It was a time of tremendous challenge and opportunity," Keehn recalls. "The Bank, and the financial services industry as a whole, were experiencing dramatic changes on virtually every front. It's hard to imagine a more exciting time to have started at the Bank." The pricing of Fed services received scant public attention initially compared with interest rate deregulation and uniform reserve requirements. The transition to priced services, however, posed a major challenge to the Reserve Banks and eventually had a ripple effect on institutions and their customers. The Chicago Fed's first step was to research its new customers and to revise its services strategy, an effort headed by First Vice President Daniel Doyle. Previously, the Fed Banks provided a fairly basic, operationally prudent, array of services. With the advent of pricing, the Chicago Fed worked to offer a wider variety of services at a relatively low price. "As a general rule," Doyle notes, "we gave them more options to choose from, more services. There was much more responsiveness to customer needs." The Bank's electronic services volumes were not expected to drop markedly, because of the lack of close substitutes on the market. The Bank's check clearing services, however, were expected to face significant competition. Fedprocessed check volume did drop with the advent of pricing—approximately 20 percent for the System in the last quarter of 1981, although the Bank's decrease was about half that amount. Some expected the Fed to scale back its operations as a result of lower volumes. Instead, however, the Fed decided to intensify its efforts and let the marketplace determine its role in financial services. Doyle notes that 1984 was a "crucial year" for priced services. The Bank had failed to meet its volume objectives in the previous year and faced the need to make changes. The Bank cut costs, continued to refine its services, and reorganized departments to centralize responsibility for all aspects of a major product. That year the Chicago Fed recovered some of its lost check business; the trend shifted toward growth rather than loss. The MCA affected the Fed's services, and eventually the financial services industry, in several ways. Check clearing schedules were shortened, new check services were introduced, and relatively low prices were maintained. As required by the MCA, Fed float was recovered through a combination of pricing and more efficient operations. In electronic services, Automated Clearinghouse (ACH) usage, aided initially by price subsidies, increased substantially. The MCA also enabled the Fed Banks to encourage more efficient online wire transfers through price incentives and the availability of inexpensive computer equipment. The MCA also had a dramatic effect on the Bank itself. "It produced a much leaner, more efficient, and, I think, more satisfying organization," Doyle observes. "It's one thing to respond to internal standards, it's quite another thing to meet the standards of the marketplace. I think we were very successful." As prices increased through the 1970s, there was growing public attention on inflation. Copyrighted Chicago Tribune Company, all rights reserved, used with permission. Newsweek, May 29, 1978, copyright 1978, Newsweek Inc., all rights reserved, used with permission. "Given the performance American of the economy... can we be optimistic? During the closing year of the decade, we experienced the worst inflation of the post-war period... can we break away and avoid still higher inflation a few years down the road?" -President's Letter, 1979 Annual Report, Federal Reserve Bank of Chicago As events unfolded that would eventually lead to the Monetary Control Act, the Seventh District economy underwent a painful readjustment process. The 1970s had provided little respite from the inflation problems that had built up in the late 1960s. Wage and price controls instituted in 1970 were, in the words of the Bank's monthly review, "judged unsatisfactory by virtually everyone." 1974 was labeled a "year of calamity" by the Bank's review, which noted that the U.S. economy was hit by an "unprecedented In 1917, the Chicago Bank's annual array of adverse developments" ranging from record price inflation to shortages to the nation's first presidential resignation. The Federal Reserve tried to curtail the inflationary trend. In 1975, the Fed announced a policy to reduce money growth rates to eliminate inflation, an attempt that generally failed. Four years later, the U.S. was jolted by the second oil price shock of the decade, and experienced its worst inflation in the post-war period. A dramatic gesture was needed. On Saturday, October 6,1979, the FOMC gathered for an emergency meeting in Washington, D.C. to discuss the deteriorating economic situation. To avoid publicity, FOMC members were located in different hotels around the city. [22] That evening recently appointed Chairman Paul Volcker announced that the Federal Reserve's monetary policy efforts would focus on reaching target levels of bank reserves through open market operations. The announcement was a signal of the Fed's determination to wring inflation from the economy once and Reserve report noted somewhat mournfully that only one District bank opted to take advantage of its fledgling transfer FRCS 8 0 service. Seventy years later, the Bank's FedWire service was transferring approximately $23 trillion annually. Much of this tremendous growth occurred after 1964 as the wire transfer operation evolved from utilizing telegraphs adding machines to personal computers and communication networks. and high-volume Prior to 1965, institutions gener- ally called or wrote the Chicago Fed with a request to transfer funds via telegraph. In 1966, the Chicago Fed introduced on-line wire transfer service that utilized electronic In the next five years, the annual typewriters. dollar value of wire trans- fers at the Chicago and Detroit offices jumped from billion to $2.39 trillion. an By 1972, institutions $889 could send wire transfer requests directly to computers in Chicago or Detroit. The Federal Reserve Bank of Chicago also took a leading role in designing and implementing communications nationwide network in the early 1980s to handle the System's growing volumes. current communications Today, the Federal Reserve's network (FRCS-80) is based at Chi- cago and operated by the Bank. 30 a As inflation and market interest rates rose in the 1970s, banks found themselves constrained by interest rate ceilings. Many banks tried to compensate by offering customers a variety of "premiums "for opening accounts. The oil embargo of 1973 led to gas shortages and soaring energy prices. AP/World Wide Photos for all. The immediate market response was dramatic—a sharp increase in the entire spectrum of interest rates. The economy began to slow. By the fourth quarter of 1981, GNP was declining at an annual rate of 4.9 percent. [22] The recession was particularly tough on the Midwest. The Bank's economic review noted in 1981 that "for almost two years the economy has stumbled on a rocky path marked by soaring inflation, recordhigh interest rates, and a constant specter of fuel shortages... the Seventh Federal Reserve District has shouldered a disproportionate share of the trouble." As the Midwest economy faltered, the Bank became involved in cooperative efforts directed at improving the longrun economic performance of the Seventh District. Working with various public and private groups, the Bank participated in a number of economic development projects including studies of the Great Lakes region, the states of Iowa and Wisconsin, and the cities of Chicago and Detroit. in the nation's history. And the Midwest finally shared in the good news—its performance was the best of the decade. For the first time since 1980, overall economic activity in the Midwest outpaced the rest of the nation. "While one year does not make a trend," the 1987 annual report concluded, "there is reason to be Eventually the national economy began to improve. In his Congressional testimony in July 1982, Volcker reported that "evidence now seems strong that the inflation tide has turned in a fundamental way." [22] At year-end 1982, Chicago Fed President Keehn wrote in the Bank's annual report that "there is mounting evidence that long-term economic growth could and would be renewed without igniting inflation." By 1985, the U.S. economic expansion had reached its fourth year without reigniting inflation. Still the Midwest lagged behind. "It is particularly—and painfully— clear to all of us in the Midwest that the expansion has been uneven in different regions of the country...," Keehn wrote in 1985. "Despite strong gains in employment nationally, manufacturing jobs continue to decline and the agricultural sector remains extremely depressed." The outlook for the Midwest finally brightened in 1987. The U.S. entered its sixth year of uninterrupted growth— the longest peacetime expansion optimistic about the prospects for the District's economy as it approaches the 1990s." "Mr. [Smith] said that profits will be much lower...it is tough to make much profit when deposits are 71/4% or more and the usury limit is 9%." -Bank Relations Department interview with District banker, November 1973 Economic troubles, combined with increased competition, began to take a toll on banks in the early 1980s. The number of bank failures increased dramatically compared with previous decades. Agricultural banks, feeling the effects of a severe slump in 31 the farm sector, were especially hard-hit. By 1984, ag bank failures accounted for 32 percent of all bank failures nationally. The large percentage of ag banks in the Seventh District posed "a tremendous challenge for us," said James Morrison, who headed the Bank's Supervision and Regulation Department from 1968 to 1988. With only a few exceptions, however, ag banks' strong capital and stable deposits enabled them to withstand the crisis. By 1986, the decline in ag bank performance began to moderate. At the other end of the spectrum from the predominately small ag banks, some large money center banks began to experience difficulties in the early 1980s. The uncertainty surrounding the repayment of foreign loans, and the severe slump in certain sectors such as energy, contributed to their problems. The moneycenter bank problems emphasized the growing complexity of the financial system. A bank run was no longer necessarily a local phenomenon, but could originate in one part of the world with the break of dawn Problems in the farm sector began to affect agricultural banks in the early 1980s. Illinois Department of Agriculture In the mid-1980s, the Bank began a massive renovation of its headquarters building. ' and follow the sun across the globe. The potential for a worldwide electronic run presented new challenges for the Chicago Reserve Bank. Unlike 1933, however, when regulators were unable to prevent the collapse of two Detroit banks that helped trigger the banking holiday, the Federal Reserve and other regulators had the resources to help prevent, if necessary, a bank from closing. The rapid plunge in the stock market in October 1987 provided another indication of the financial system's growing complexity. Following the crash, the Fed responded by injecting liquidity into the financial system, by emphasizing its willingness to lend to banks through the discount window, and by extending the hours on FedWire, the Federal Reserve's large dollar transfer system. At the same time, each of the Reserve Banks intensified its monitoring activities to detect signs of further stress. At the Chicago Fed, Bank officials paid particular attention to developments at local exchanges. While the stock market crash in 1987 was perhaps the most notable financial disturbance in 50 years, it also provided a strong indication of the fundamental resilience of the financial markets. As the financial system evolved, so did the Chicago Fed's supervision of banks and bank holding companies. "Our view of banks became dramatically broader in the 70s and 80s," Morrison noted. "Previously, we would check the accuracy of the bank's books and review the loan accounts. Today, there is a broader scope. The interest rate position—what the bank is paying for money and what it is receiving—is much more carefully reviewed. The organization and structure of a bank is looked at more closely. And there is much more emphasis on policy on the assumption that a bank's policy will influence future decisions. Institutions—especially the bigger ones—are monitored on a 'flow basis' throughout the year through statistical reports and examinations. It's a much more complicated process, but we're also dealing with a much more complicated financial system." "We shall deal with our economic system as it is and as it may be modified, not as it might be if we had a clean sheet of paper to write upon, and step by step we shall make it what it should be. " -Woodrow Wilson, 1913 Woodrow Wilson's observation on the passage of the Federal Reserve Act is surprisingly apt in 1988. The Chicago Reserve Bank has 32 never had "a clean sheet of paper to write upon." Instead it continues to respond to the challenges of the evolving financial and economic system. This continuing process is symbolically captured by the recently completed renovation of the Bank's headquarters building, a project undertaken to satisfy the Bank's needs well into the next century. As it did throughout its first 75 years, the Bank is preparing to meet, "step by step," the challenges of the coming decades. F I N A N C I A L S T A T E M E N T S A N D E X E C U T I V E S S T A T E M E N T O F C O N D I T I O N DECEMBER 31, 1987 DECEMBER 31, 1988 ASSETS $ Gold certificate account 1,394,000,000 $ 2,605,492,303 (1,715,509,834) Interdistrict settlement account Special drawing rights certificate account Coin 1,383,000,000 656,000,000 656,000,000 44,379,423 30,996,628 Loans and securities: Loans 44,415,000 19,275,000 845,754,016 875,886,823 28,367,341,607 25,385,206,512 29,257,510,623 26,280,368,335 773,969,167 619,910,166 99,839,960 70,486,933 FDIC assumed indebtedness 2,316,178,167 2,623,471,867 Other 1,868,157,282 1,617,504,999 4,184,335,449 4,240,976,866 Federal agency securities U.S. government securities Total loans and securities Cash items in process of collection Bank premises O t h e r assets: Total other assets TOTAL ASSETS $ 34,694,524,788 $ 35,887,231,231 $ 29,657,842,254 $ 30,029,272,890 LIABILITIES Federal Reserve notes Deposits: Depository institutions U.S. Treasury-general account Foreign 3,413,112,943 4,324,615,741 0 0 19,200,000 20,400,000 106,580,985 145,421,015 3,538,893,928 4,490,436,756 Deferred availability cash items 564,978,798 522,129,789 O t h e r liabilities 386,797,008 322,785,696 Other Total deposits Total liabilities $ 34,148,511,988 $ 35,364,625,131 $ 273,006,400 $ 261,303,050 CAPITAL ACCOUNTS Capital paid in Surplus 273,006,400 261,303,050 Total capital 546,012,800 522,606,100 $ TOTAL LIABILITIES AND CAPITAL 34 34,694,524,788 $ 35,887,231,231 S T A T E M E N T O F I N C O M E 1987 1988 CURRENT INCOME $ Interest on loans 169,974,426 $ 179,483,497 2,168,845,209 1,858,905,221 Interest on investments of foreign currencies 38,564,698 46,776,722 Service fees 89,093,953 85,444,353 2,405,836 2,439,365 Interest on government securities All other Total current income $ 2,468,884,122 $ 2,173,049,158 $ 147,164,235 $ 142,027,683 CURRENT EXPENSES Operating expenses 24,497,231 22,891,037 171,661,466 164,918,720 12,412,611 12,305,001 159,248,855 152,613,719 $ 2,309,635,267 $2,020,435,439 $ 2,623,055 Other current expenses Total current expenses Less reimbursement for certain fiscal agency and other expenses Current net expenses CURRENT NET INCOME ADDITIONS TO (OR DEDUCTIONS FROM) CURRENT NET EARNINGS Net profit (or loss) on sales of securities $ 4,853,276 Net profit (or loss) on foreign exchange transactions (65,392,051) 245,381,666 Board of Governors assessment (33,779,083) (34,556,202) (3,968,837) (5,212,203) All o t h e r - n e t Net additions (or deductions) NET EARNINGS AVAILABLE FOR DISTRIBUTION $ (100,516,916) $ 210,466,537 $ 2,209,118,351 $ 2,230,901,976 $ 16,088,003 $ 15,356,719 DISTRIBUTION OF NET EARNINGS Dividends paid Payments to U.S. Treasury (as interest on Federal Reserve notes) Transferred to surplus $ TOTAL 35 2,181,326,998 2,205,614,207 11,703,350 9,931,050 2,209,118,351 $ 2,230,901,976 1988 Board of Directors, Federal Reserve Bank of Chicago, from left to right: seated, J. Gabbert, K Day, M. Alexis, B. Sullivan; standing, P. Schierl, C. McNeer, E. Powers, B. Backlund, M. Naylor. D I R E C T O R S Federal Reserve Bank of Chicago CHAIRMAN Charles S. McNeer Robert J. Day Chairman of the Board and Chief Executive Officer Wisconsin Energy Corporation Milwaukee, Wisconsin Chairman and Chief Executive Officer USG Corporation Chicago, Illinois DEPUTY CHAIRMAN Max J. Naylor Marcus Alexis President Naylor Farms, Inc. Jefferson, Iowa Dean, College of Business Administration University of Illinois at Chicago Chicago, Illinois B. F. Backlund Chairman and Chief Executive Officer Bartonville Bank Bartonville, Illinois John W. Gabbert President First of America BankLa Porte, N.A. La Porte, Indiana Charles H. Bosworth, first Federal Reserve Bank of Chicago Chairman and Federal Reserve Agent, 1914-1916. James B. Forgan (First National Bank of Chicago), first Seventh District representative to the Federal Advisory Council and Council President, 1914-1919 Edward D. Powers President Fire Brick Engineers Company Milwaukee, Wisconsin Paul J. Schierl Chairman and Chief Executive Officer Fort Howard Paper Company Green Bay, Wisconsin Barry F. Sullivan Chairman of the Board First Chicago Corporation The First National Bank of Chicago Chicago, Illinois 36 A D V I S O R Y C O U N C I L S • Advisory Council on Agriculture Ben Bement Dowagiac, Michigan Michigan Pork Producers Association Russell J. Clark Frankfort, Indiana Indiana Pork Producers Association David Conklin Corunna, Michigan Michigan Farm Bureau 1988 Board of Directors, Detroit Branch, from left to right: seated, P. Peters, R. Lindgren, B. Beltaire; standing, R. Story, D. Mandich, F. Meijer, J. Aliber. R E C T O R Richard T. Lindgren Chairman and Chief Executive Officer Comerica Bank-Detroit Detroit, Michigan Former President and Chief Executive Officer Cross 8c Trecker Corporation Bloomfield Hills, Michigan James A. Aliber Chairman of the Board and Chief Executive Officer First Federal of Michigan Detroit, Michigan Beverly Beltaire President P.R. Associates, Inc. Detroit, Michigan Robert R. Joslin Clarence, Iowa Iowa Farm Bureau Federation Chairman of the Board Meijer, Incorporated Grand Rapids, Michigan Jerry King Victoria, Illinois Illinois Pork Producers Association Phyllis E. Peters Director, Professional Standards Review Touche Ross and Company Detroit, Michigan • Advisory Council on Small Business James N. Farley Capron, Illinois Illinois Beef Association Frederik G. H. Meijer Oshkosh, Wisconsin Wisconsin Soybean Association Thomas Dorr James A. Grenlund Donald R. Mandich Gale Tigert Frank A. Buethe Detroit Branch CHAIRMAN Columbus, Indiana Indiana Grange Green Bay, Wisconsin Independent Business Association of Wisconsin Owendale, Michigan Michigan Bean Commission S Wendel E. Shireman Kenneth Dalenberg Gerald Elenbaum I Plymouth, Wisconsin Women Involved in Farm Economics Mansfield, Illinois Land of Lincoln Soybean Association Marcus, Iowa Iowa Corn Growers Association D Anita Klein Des Plaines, Illinois Independent Business Association of Illinois Enrique Loza Chicago, Illinois U.S. Hispanic Chamber of Commerce Cyril Ann Mandelbaum Des Moines, Iowa National Association of Women Business Owners/ Iowa Chapter Marilu B. Meyer Chicago, Illinois Illinois State Chamber of Commerce Michael J. Morton Southfield, Michigan The Small Business Association of Michigan Clifford A. Nederveld Ronald D. Story Lansing, Michigan National Federation of Independent Business Chairman and President The Ionia County National Bank of Ionia Ionia, Michigan Jeanne G. Paluzzi Livonia, Michigan National Association of Women Business Owners/ Michigan Chapter James L. Siegmann Goshen, Indiana Indiana Chamber of Commerce FEDERAL A D V I S O R Y John A. Travlos C O U N C I L Ottumwa, Iowa Iowa Association of Business and Industry Seventh District Representative Charles T. Fisher III Chairman and President NBD Bancorp and National Bank of Detroit Detroit, Michigan 37 O F F I C E R S Silas Keehn President Daniel M. Doyle First Vice President CENTRAL BANK ACTIVITIES • Economic Research and Information Services Karl A. Scheld Senior Vice President and Director of Research Economic Research David R. Allardice Vice President and Assistant Director of Research Gary L. Benjamin Economic Adviser and Vice President Larry R. Mote Economic Adviser and Vice President Anne Marie L. Gonczy Senior Economist and Assistant Vice President Steven H. Strongin Senior Economist and Assistant Vice President Officers and staff, Federal Reserve Bank of Chicago, November 16, 1915—the first anniversary of the Bank's opening. Herbert L. Baer, Jr. Research Officer Information Services Nancy M. Goodman Vice President Statistics Jean L. Valerius Supervision and Regulation and Loans Vice President Franklin D. Dreyer A. Raymond Bacon Examining Officer Robert A. Bechaz Senior Vice President Examining Officer Supervision and Regulation Kathleen E. Benson David S. Epstein Examining Officer Vice President George M. Gregorash Roderick L. Housenga Banking Analysis Officer Vice President John M. Montgomery Geoffrey C. Rosean Examining Officer Vice President N. Dean Rowland Nicholas P. Alban Examining Officer Assistant Vice President John A. Valenti Barbara D. Benson Information Support Officer Assistant Vice President Barbara A. Van Den Bossche John L. Bergstrom Examining Officer Assistant Vice President Gay W. Whiting Douglas J. Kasl Applications Officer Assistant Vice President Loans and Reserves William H. Lossie, Jr. Gerard J. Nick Assistant Vice President Vice President Patrick J. Tracy William J. O'Connor Assistant Vice President Loans Officer Alicia Williams Assistant Vice President 38 SUPPORT FUNCTIONS • Financial and Management Services • Support Services Carl E. Vander Wilt Senior Vice President Senior Vice President and ChiefFinancial Officer Richard P. Anstee Administrative and General Services Accounting Services Robert A. Ludwig Jerome F. John Vice President Vice President Adolph J. Stojetz Jeffrey L. Miller Vice President Operations Officer Susan H. Riis Management Services Glenn C. Hansen Vice President Assistant Vice President Facilities Improvement Robert D. Lauson Margaret K. Koenigs Assistant Vice President • Office of the General Auditor Richard P. Bush Federal Reserve Bank of Chicago Management Committee, from left to right: seated, S. Keehn, W. Oram, D. Doyle; standing, C. Furbee, F. Dreyer, R. Sloan, C. Vander Wilt, R. Bush, R. Anstee, W. Conrad, K. Scheld. General Auditor Angelina S. Chin Assistant General Auditor SERVICES TO DEPOSITORY INSTITUTIONS • Office of the General Counsel • Automation and Electronic Services William H. Gram William C. Conrad Senior Vice President Bonnie Bates Assistant Vice President Senior Vice President, General Counsel, and Secretary R. Steve Crain Assistant Vice President Legal Services Automation Support Stephen M. Pill Vice President and Data Security Officer • Operations and Check Services Frank S. McKenna Karen L. Rosenberg Automation Officer James L. Strieber Automation Officer Computer Operations James A. Suprinski Vice President Charles L. Schultz Assistant Vice President Brenda D. Ladipo Automation Officer Electronic Services Glen Brooks Vice President Assistant Vice President Linda B. Grimmer Assistant Vice President System Communications Center George E. Coe Vice President Brian W. Hausmann Assistant Vice President Gerald I. Silber Assistant Vice President Sheryn E. Bormann Personnel Officer FEDERAL RESERVE SYSTEM SECURITIES PRODUCT OFFICE (effective January 1, 1989) Teri J. Kurasch James A. Bluemle Vice President ahd Associate General Counsel Vice President and Securities Product Manager Joan M. DeRycke Cash, Fiscal Agency, and Securities Services Assistant Vice President and Assistant Secretary David R. Starin Vice President Jerome D. Nicolas Assistant Vice President Lawrence J. Powaga Assistant Vice President Check Services Wayne R. Baxter Vice President Paul J. Bettini Vice President DISTRICT OFFICES William A. Bonifield, Jr. • Detroit Branch F. Alan Wells Vice President Roby L. Sloan Assistant Vice President Allen R. Jensen Senior Vice President and Branch Manager Patrick A. Garrean Vice President Frederick S. Dominick Operations Officer Assistant Vice President Vice President and Assistant Branch Manager • Regional Offices Des Moines Charles M. Lund Yvonne H. Montgomery Assistant Vice President Theodore E. Downing, Jr. James M. Rudny Vice President Office of the Bank Secretariat Senior Vice President Assistant Vice President Human Resource Services Thomas G. Ciesielski Charles W. Furbee Kenneth R. Berg Assistant Vice President Vice President Assistant Vice President Assistant Vice President Diane S. Noble Joseph R. O'Connor Assistant Vice President Assistant Vice President Colleen M. Walsh Richard L. Simms, Jr. Assistant Vice President Assistant Vice President 39 Edward L. Ketchmark Indianapolis Donna M. Yates Assistant Vice President E X E C U T I V E C H A N G E S DIRECTORS ADVISORY COUNCILS • The selection process for a Reserve Bank's nine-member board of directors ensures broad representation from banks of varying sizes, as well as from diverse sectors of the District economy, including consumers, industry, agriculture, commerce, services, and labor. T h r e e bankers and three nonbankers are elected by m e m b e r banks. Three additional nonbank directors are appointed by the Board of Governors in Washington, D.C. • T h e Federal Advisory Council is comprised of one m e m b e r from each of the 12 Federal Reserve Districts. Each year the Chicago Reserve Bank's board of directors selects a representative to this group. T h e council meets quarterly with the Board of Governors in Washington, D.C., to discuss current business and financial conditions. Charles T. Fisher III served a second term as the Chicago Bank's representative in 1988 and also was selected to serve as the council's president.. • T h e directors have a general governance responsibility for the management of the Bank's operations, act on the Bank's discount rate, and contribute to the formulation of U.S. monetary policy. • The members of the Bank's two advisory councils served the second year of their two-year terms in 1988. Members are selected from nominations by Seventh District small business and agricultural organizations and provide a vital communication link between the Bank and these important economic sectors. • For 1988, Robert J. Day was redesignated chairman of the board and Marcus Alexis was redesignated deputy chairman. In addition, Dr. Alexis was appointed to a second three-year term as a director, and Edward D. Powers and Barry F. Sullivan were elected to serve second terms beginning in 1988. • At year-end 1988, J o h n W. Gabbert and Max J. Naylor were reelected as directors and Charles S. McNeer was reappointed, all to begin second three-year terms in 1989. In addition, Mr. Day and Dr. Alexis were again n a m e d to one-year terms as Reserve Bank chairman and deputy chairman, respectively. • Seven members serve on the board of the Bank's Detroit Branch. Of these, three nonbankers are appointed by the Board of Governors and four additional directors are selected by the Chicago Reserve Bank board. • At year-end 1987, the Board of Governors appointed Beverly Beltaire to a three-year term as a Branch director. At the same time, the Chicago Reserve Bank board named James A. Aliber and Frederik G. H. Meijer to serve three-year terms on the Branch board. They replaced three directors who completed their terms of service: Thomas R. Ricketts, chairman of the board and president, Standard Federal Bank, Troy, Michigan; Richard M. Gillett, chairman of the board, Old Kent Financial Corporation, Grand Rapids, Michigan; and Robert E. Brewer, senior vice president (retired), K m a r t Corporation, Troy, Michigan. • At year-end 1988, director Richard T. Lindgren, who served as the Branch chairman for 1988, was again n a m e d chairman. Also effective for 1989 was the appointment of Robert J. Mylod, chairman, president, and chief executive officer of Michigan National Corporation, Farmington Hills, to a three-year term, replacing Donald R. Mandich who completed his term. Additionally, Phyllis E. Peters was appointed to a second threeyear term as director. OFFICERS • Appointments to a Federal Reserve Bank's official staff are made by the Bank's board of directors. In 1988 the board promoted Franklin D. Dreyer to senior vice president in charge of the Supervision and Regulation and Loans Department. Dreyer was n a m e d to the position u p o n the retirement ofJames R. Morrison, senior vice president, who had served the Chicago Reserve Bank for 35 years. • Officers promoted to vice president during 1988 included Nancy M. Goodman, Information Services; Allen R. Jensen, Check Services;Jerome F John, Accounting Services; and James A. Suprinski, Computer Operations. • Promoted to assistant vice president were Barbara D. Benson, Supervision and Regulation; Angelina S. Chin, Office of the General Auditor; Linda B. Grimmer, Electronic Services; Brian W. Hausmann, H u m a n Resources; Margaret K. Koenigs, Financial and Management Services; Yvonne H. Montgomery, Detroit Branch; Diane S. Noble, Operations and Check Services; and Steven H. Strongin, Economic Research. In addition, Donna M. Yates was n a m e d assistant vice president in charge of the Bank's Indianapolis Office. • O t h e r officers appointed during 1988 were George M. Gregorash, banking analysis officer, J o h n A. Valenti, information support officer, and Kathleen E. Benson, J o h n M. Montgomery, N. Dean Rowland, and Barbara A. Van Den Bossche, examining officers, in Supervision and Regulation; Brenda D. Ladipo, Karen L. Rosenberg, and James L. Strieber, automation officers in Automation and Electronic Services; Jeffrey L. Miller, operations officer in Accounting Services; and Patrick A. Garrean, operations officer at the Detroit Branch. • T h e past year also saw the retirements of Daniel P. Kinsella, Robert W. Wellhausen, and Allen G. Wolkey, all vice presidents in Operations and Check Services, who had each served the Bank for over 40 years, and also Joseph G. Kvasnicka, economic adviser and vice president in Economic Research, following 23 years of service. 40 SELECTED BIBLIOGRAPHY 1. 20. Klebaner, Benjamin J. Aldom, Robert S. The Impact of 2. 3. 4. Commercial Banking in the United States: A History. Hinsdale, Illinois: T h e Dryden Press, 1974. MICR on Deposit Accounting. New York: Morgan Guaranty Trust C o m p a n y , 1961. 21. Krooss, Herman E., e d . American Banker. 150th Anniversary Commemorative New York, 1986. Anderson, Clay J. A Half-Century Documentary History of Banking and Currency in the United States. New York: Chelsea H o u s e Publishers, 1969. Edition. of Federal Reserve Policymaking, 19141964. Philadelphia: Federal Reserve Bank, 1965. 22. Neikirk, William R. Beckhart, Benjamin Haggott. 23. New York Clearing House Volcker—Portrait of the Money Man. New York: C o n g d o n & W e e d , Inc., 1987. Association. The Federal Reserve Re-Examined. New York, 1953 Federal Reserve System. New York: American Institute of Banking, 1972. 24. Prochnow, Herbert V., e d . 5. Chandler, Lester V. Benjamin Strong, Central Banker. Washington D.C.: T h e Brookings Institute, 1958. 6. Cloos, George W., e d . The Federal Reserve System. New York: H a r p e r & Brothers, 1960. 25. Spahr, Walter E. The Clearing 1776-1976—A Bicentennial Chronology. Chicago: Federal Reserve Bank, 1976. 26. Sprague, Irvine H. Bailout. 7. 8. Annual Report. Chicago, 1915-1987. 9. Business Conditions. Chicago, Monthly Issues, 1917-1976. 10 . 11 12 . The Commentator. Chicago, Various Issues, 1942-1971. Economic Perspectives. Chicago, Bimonthly Issues, 1977-1987. New York: Basic Books, Inc., 1986. Federal Reserve Bank of Chicago. Among Ourselves. Chicago, Various Issues, 1919-1931. and Collection of Checks. New York: T h e Bankers Publishing Company, 1926. 27. Timberlake, Richard H. The Origins of Central Banking in the United States. Cambridge: Harvard University Press, 1978. 28. U.S. Federal Reserve Board of Governors. Annual Report. Washington, D.C., 1914-1987. 29 . Federal Reserve Bulletin. Washington, D.C., 1915-1987. 30. Warburg, Paul M. The Federal Midwest Banking in the Sixties. Chicago, 1970. Reserve System—Its Origin and Growth. New York: T h e MacMillan Company, 1930. 31. Youngman, Anna. The Federal 13. Federal Reserve Bank of Philadel- phia. " H o w Banking T a m e s its P a p e r T i g e r . ' ' Business Review. July 1960, pp. 2-11. Reserve System in Wartime. New York: National Bureau of Economic Research, 1945. 14. Friedman, M. and Schwartz, A.J. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1973. 15. Glass, Carter. An Adventure in Constructive Finance. New York: Doubleday, Page a n d C o m p a n y , 1927. 16. Griswold, John A. A History of the Federal Reserve Bank of Chicago. St. Louis: By t h e A u t h o r , 1936. 17. Huston, Francis Murray. Financing an Empire—History of Banking in Illinois. Chicago: S.J. Clarke Publishing Company, 1926. 18. James, F. Cyril. The Growth of Chicago Banks. New York: H a r p e r & Brothers Publishers, 1938. 19. Johnson, Roger T. Historical Beginnings... The Federal Reserve. Boston: Federal Reserve Bank, 1977. This report was produced and published by Public Information staff members including Jim Holland who authored Historical Perspectives. 1914 1989 FEDERAL RESERVE BANK OF CHICAGO Head Office 230 South LaSalle Street P.O. Box 834 Chicago, Illinois 60690 Detroit Branch 160 West Fort Street P.O. Box 1059 Detroit, Michigan 48231 Des Moines Office 616 Tenth Street P.O. Box 1903 Des Moines, Iowa 50306 Indianapolis Office 41 East Washington Street P.O. Box 20208 Indianapolis, Indiana 46206 Milwaukee Office 304 East State Street P.O. Box 361 Milwaukee, Wisconsin 53201 For additional copies of this report, contact the Public Information Center, Federal Reserve Bank of Chicago, at 312/322-5111.
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