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1979 Annual Report FEDERAL RESERVE BANK OF CLEVELAND 1979 Annual Report Federal Reserve Bank of Cleveland Contents A Message from the President 2 Comparative 8 Comparison Statement of Condition of Earnings and Expenses 9 Directors 10 Officers 12 February 29, 1980 Cleveland, Ohio To Member Banks in the Fourth We are pleased Cleveland. This is a period Our economic thrift, to present structure and distorts the 7979 Annual Report of the Federal change is threatened our economic of financial Reserve System. These problems message in this report Reserve District: of unusual in the structure and suggests Federal discusses the alterations by soaring decisions. markets demand operation Rising immediate necessary in the nation's that interest rates for 1979, and sweeping to the changing support. and we look forward changes The president's financial marketplace that confront banks, us. their directors All of you have enabled to your assistance in the future. R.E. Kirby Chairman of the Board penalizes base of the Federal problems all of our member for their continued economy. savings, and remedy. to resolve the economic to thank erodes the membership attention the need to respond and the bank personnel us to meet our commitments inflation have narrowed We wish to take this opportunity and officers, and uncertainty Reserve Bank of Willis J. Winn President and co- A Message from the President The critical nationwide need for a central payment system-is bank-to assure effective the same now as when established in 1913. Now, as then, the nation of money to grow and growth Federal of the economy, Reserve anism at a suitable that is charged will facilitate means The transfers acceptable The among everywhere nature needs a mechanism policy and a uniform Reserve between of account Federal buyers balances Reserve a multitude Now, as then, System full employment pressures. the nation and sellers. Although a mechanism of local banks so that The needs a mech- currency are a much more efficient provides was that will enable the supply to facilitate not so rapid as to add to inflationary payments transfers those but the Federal rate rapid enough with this responsibility. used for payments, of payment. rate-a monetary can be and common for clearing such payments and settling are uniformly in the nation. of the financial marketplace, however, has changed radically since 1913. Nonbank institutions have developed deposit and deposit-like accounts with payment features closely competitive with those of commercial banks. Electronic transfer and computerized storage of account balances have multiplied the available means of making payments and expanded the range of short-term interest-bearing assets that can be substituted for payment account balances. Soaring interest rates have made noninterest-bearing deposits decidedly less attractive assets, both for bank customers As a result of these developments, the Federal Reserve System needs. A growing proportion direct control of the System. and for banks themselves. the beginning-of-the-century has become incompatible membership with end-of-the-century and direct access to free Federal Reserve services. Voluntary bank in the is becoming because foregone 2 Federal the value of free clearing on required of financial of money is in accounts at institutions that are outside the Nonbank issuers of payment accounts are denied both member- ship in the System membership structure Reserve System and settlement services increasingly is far outweighed commercial unprofitable, by the revenues reserve deposits. 1979 Annual Report The Federal necessary Reserve to assure is caught noninflationary in a vicious circle. The critical money growth central and a nationwide banking uniform policies payment system worsen inequities between member and nonmember banks, causing an exodus of banks from the System. Dwindling membership weakens the foundations required for an effective anti-inflation monetary policy. The Monetary Policy Problem I nflation has been accelerating for almost grips with the problem, we have gradually interest rates toward measures 15 years. In a continuing effort to come to shifted emphasis from traditional control of that focus more directly October 6, 1979, policy actions represent another also highlight the monetary policy problem. The restrictive policies slower rates of growth adopted were achieved. interest rates and broadened holding noninterest-bearing policy actions further in October the actions increases to slow money lift member disadvantage growth. banks' opportunity by-product of member Our but they growth, that slow money growth reserves. This unavoidable the competitive of money step in this direction, were intended However, reserve requirements) required on control significant and (higher cost of of the October 6 banks. Re-orientation of System procedures toward more direct control of the quantity of reserves supplied to member banks was intended to strengthen our control of money growth. For these new procedures to be effective, however, additional moves involving accounting and the discount mechanism may be required. Such actions may further member banks' inconvenience and costs relative to nonmembers, making Federal membership even less attractive. reserve increase Reserve Declining membership has become a major problem. Board of Governors Chairman Paul A. Volcker testified before the Senate Committee on Banking, Housing, and Urban Affairs, "During the fourth quarter of 1979 and the first few weeks of 1980, 69 banks with about $7 billion in deposits have given notice of withdrawal from membership. The loss of deposits in this short period exceeds that of any full year. The recent withdrawals very sizable banks in Pennsylvania, with more than $3 billion in deposits seems to me especially significant. They show that much larger institutions now prepared to take the step .... " 1979 Annual Report by two between them, than before are 3 "In more and more stockholders bank areas of the country, and customers. and reluctant or impossible to declining of new monies demand The money Federal money to include Reserve factor Regulatory of a strong increasingly new monies-as weakens rigidities advances over which in a reactive importance that and high interest substitutes remains of the has to be justified find that justification technological and telecommunications), membership to central difficult involved." another by nonbanks. deposits), interest-bearing redefining charter membership, interest devise conscious to give up a national development management banks in the light of the heavy burden In addition on Even continued monetary (such (such as the prohibition as computerized rates have encouraged we have no direct we have just done-is position, constantly control only trying of account nonbanks control. is to Periodically a partial to catch response. an evolving quarry. The overall effect of declining basis for our monetary System, we cannot membership policy control. expect Without and proliferating legislation monies to restructure is erosion the Federal of the Reserve to halt the erosion. The Payment System Problem W hen the Federal the banking Reserve years. Reserve system. has provided inter-bank Even was established, though not the core of a uniform We are responsible of the System wire for distribution transfer service, the payment all banks national joined payment and quality system the System, mechanism more than the Federal for more than 65 of all coin and currency, and for processing was essentially for operation half of all checks collected. The unique from certain contribution of Federal services to the payment mechanism results guarantees: nationwide access to a uniform nationwide maximum day availability 4 Reserve of funds two-day set of payment availability in automated system of funds clearinghouse services, in check collection and next- transfers, 1979 Annual Report nationwide collection of any item, regardless of its size and the location of the paying bank, nationwide transfer of same-day funds to and from anyone, anywhere. Direct access to these guarantees, however, is provided only for member banks. As membership declines and new types of money proliferate, most money issuers can access our core services only through remaining member banks. Competitive all money issuers borne exclusively cannot broaden equity in the marketplace requires that our services be made available to on equal terms. To do so while reserve requirements remain a burden by member banks would surely speed their exodus from the System. We access to our services without a legislative restructuring of the Federal Reserve System. Who Should Pay for Central Bank Services? D uring the past year, both the u.s. House of Representatives and the Senate considered legislation dealing with monetary control and payment system problems. Some of the proposed bills would ing reserve requirements reserve requirements have improved or by paying to all money-issuing the competitive interest positions of members by reduc- on reserves. Other bills would have extended institutions. Unfortunately, none of these bills has yet been enacted. A recurring simple question control. theme in attempting of who should to restructure the Federal bear the costs of central-bank monetary Reserve System and payment is the system M onetary Policy. With the shift in policy emphasis toward control of money growth, the role of reserve requirements becomes more important. Reserve requirements could limit the quantity of money to a simple multiple of the number of "tickets" supplied by the Federal Reserve in the form of bank reserves. Currently, however, this link between reserves and money is not a dependable basis for implementing monetary policy. Still in place are institutional arrangements that were more suitable for implementing policy based on interest rates: 1979 Annual Report 5 1. Reserve requirements are not uniform, making it difficult money would be associated with a given supply of reserves. to predict how much 2. Reserve accounting allows member banks to issue money first and then acquire reserves to cover that money two weeks later. Banks thereby predetermine the amou nt of reserves they receive. 3. The discount mechanism allows banks to borrow-frequently below market ratesreserves needed beyond those supplied through open market operations. These factors prevent full reliance on the reserve requirement link to guide money growth, but the System is reluctant to modify these arrangements lest it intensify the vicious circle that is eroding the membership base. A factor in controlling requirements. external to the Federal Reserve that weakens money growth is the ability Legislation that would spread would still leave the Federal the role of reserve requirements of nonmember money issuers to avoid these reserve requirements among all money issuers Reserve in a reactive position, because new kinds of money are continually being developed. As long as technological change, regulatory rigidities, and high interest rates provide continuing incentives, we will have to periodically redefine money and redraw reserve requirement boundaries. An immutable monetary policy process should not be expected in a changing world. For the foreseeable future, however, effective monetary policy requires that the reserve requirement costs of central bank control be spread among all current money issuers, both bank and nonbank. F ederal Reserve Services. Pricing is the preferred basis for distributing services. Advantages are many. Pricing would prevent overuse of "free" Reserve Bank services; stimu- late use of new, cheaper payment devices; promote competition in the private sector; maintain efficiency in Federal Reserve Banks themselves; and offset the loss of revenue from a reduced reserve requirement burden. Financial services of the Federal Reserve embody unique guarantees and, for this reason, form the core of the uniform national payment system. At the heart of the question of how to price is the difficult decision: should only those who directly use Federal Reserve services pay for these guarantees, or should a broader public pay? 6 1979 Annual Report If each user were charged more (either in money users. On the other Reserve fact, users would or in payment hand, suppliers required to guarantee possible service to high-cost group-the general uniform users would pay markets than low-cost among all users, Federal than private-service in serving users. In low-cost users, users. way to price is uniformly, a nationwide For more than 65 years, membership uniformly markets be able to specialize the most equitable In this case, the broadest the subsidy would high-cost for access to national if total costs were distributed Reserve to guarantee A third and clearly cost. delays) pay more for access to national in this case, private leaving the Federal the actual cost of each transaction, but at less than full public=would payment share the cost of system. and reserve requirements have blended the cost of monetary control with the cost of Federal Reserve services and have passed that cost on to member banks in return for free services. Now it has become imperative to spread the cost of monetary control more equitably among all money issuers. Efficiency and equity require that our services be priced explicitly, although carefully, lest our public service guarantees be priced out of the market. Effective monetary policy and a uniform nationwide payment system demand a restructuring of the Federal Reserve System in these directions. 1979 Annual Report 7 COMPARATIVE STATEMENT OF CONDITION December 31, 1979 ASSETS Gold Certificate Reserves Special Drawing Rights Certificates Coin Loans to Member Banks Federal Agency Obligations - Bought Outright U.S. Government Securities: Bills Notes Bonds Total U.S. Government Securities Total Loans and Securities Cash Items in Process of Collection Bank Premises Other Assets Interd istrict Settlement Accou nt Total Assets December 31, 1978 $646,050,000 149,000,000 42,406,758 $921,035,900 112,000,000 32,976,197 54,700,000 660,000,825 31,050,000 657,107,398 3,634,652,454 4,538,501,435 1,169,091 ,069 3,508,654,478 4,565,303,131 1,037,381,316 9,342,244,958 9,111,338,925 10,056,945,783 9,799,496,323 662,390,056 23,224,790 370,470,917 (627,877,934) 808,062,973 23,137,140 298,083,638 (437,629,820) $111322161°1370 $111557z 162z351 $9,026,664,652 $8,551,157,177 L1ABI L1TI ES Federal Reserve Notes Deposits: Member Bank Reserve Accounts U.S. Treasurer - General Account Foreign Other Deposits Total Deposits Deferred Availability Cash Items Other Liabilities Total Liabilities 1,101,192,467 358,145,019 25,415,000 73,075,781 1,797,890,606 388,312,886 17,229,500 35,640,685 1,557,828,267 2,239,073,677 375,999,179 172,330,472 445,532,329 137,838,568 $11,132,822,570 $11,373,601,751 CAPIT AL ACCOUNTS Capital Paid in Surplus Total Liabilities and Capital Accounts 8 $94,893,900 94,893,900 $11,322,610,370 $91,780,300 91,780,300 $11,557,162,351 1979 Annual Report COMPARISON OF EARNINGS AND EXPENSES 1979 Total Current Earnings Net Expenses Current Net Earnings 1978 $823,249,108 44,108,648 $694,814,242 779,140,460 652,851,614 41,962,628 Additions to Current Net Earnings: All Other Total Additions 634,945 25,033 634,945 25,033 Deductions from Current Net Earnings: Loss on Sales of U.S. Government Securities (Net) Loss on Foreign Exchange Transactions (Net) All Other Total Deductions 12,540,229 10,852,014 310,439 42,982,973 58,019 29,006 12,879,674 53,893,006 12,244,729 53,867,973 4,288,000 4,522,400 Net Earnings before Payments to U.S. Treasury 762,607,731 594,461,241 Dividends Paid 5,622,240 753,871,891 584,291,421 3,113,600 4,761,650 $762,607,731 $594,461,241 Net Deductions Assessment for Expenses of Board of Governors Payments to U.S. Treasury (Interest on F. R. Notes) Transferred to Surplus Total 1979 Annual Report 5,408,170 9 Directors -1979 FEDERAL RESERVE BANK OF CLEVELAND Chairman ROBERT E. KIRBY Chairman and Chief Executive Deputy Chairman ARNOLD R. WEBER Provost, Carnegie-Mellon Officer, Westinghouse University, Pittsburgh, JOHN W. ALFORD Chairman of the Board and Chief Executive JOHN A. GELBACH Chairman of the Board, Central National J. L. JACKSON President, Falcon Coal Company Electric Corporation, Bank, Cleveland, Inc., Lexington, WALTER J. ROBB, Sr. Chairman and Senior Partner, Proctor, \ Bank and Trust Company, Robb & Company, HAYS T. WATKINS Chairman and President, Chessie System, Cleveland, FEDERAL COUNCIL 10 Ohio Ohio Officer, Eaton National MERLE E. GILLIAND Chairman and Chief Executive Bank, Newark, Ohio Kentucky EVERED L. MAFFETT President and Chief Executive ADVISORY Pennsylvania Pennsylvania Officer, The Park National CHARLES Y. LAZARUS Chairman, The F. & R. Lazarus Co., Columbus, Pittsburgh, Eaton, Ohio Granville, Ohio Ohio MEMBER Officer, Pittsburgh National Bank, Pittsburgh, Pennsylvania 1979 Annual Report CINCINNATI BRANCH Chairman LAWRENCE H. ROGERS, II President and Chief Executive Officer, Omega Communications, MARTIN B. FRIEDMAN President, Formica Corporation, Cincinnati, LAWRENCE C. HAWKINS Senior Vice President, University WALTER W. HILLENMEYER, Chairman and Chief Executive ELDEN HOUTS President, The Citizens Commercial Ohio National Bank and Trust Company, SISTER MICHAEL LEO MULLANEY President, St. Joseph Hospital, Lexington, PITTSBURGH Cincinnati, First Security WILLIAM N. LlGGEIT Chairman of the Board and Chief Executive Ohio Ohio of Cincinnati, Jr. Officer, Inc., Cincinnati, Officer, Bank and Trust Company, Lexington, Kentucky Celina, Ohio First National Bank of Cincinnati, Cincinnati, Ohio Kentucky BRANCH Chairman G. J. TANKERSLEY Chairman and Chief Executive Officer, Consolidated WILLIAM E. BIERER President, Equibank N.A., Pittsburgh, ROBERT W. FISCUS President and Chief Executive Pittsburgh, Pennsylvania Pennsylvania Officer, The Savings & Trust Company R. BURT GOOKIN Director, H. J. Heinz Co., Pittsburgh, of Pennsylvania, Indiana, Pennsylvania Pennsylvania WILLIAM H. KNOELL President, Cyclops Corporation, Pittsburgh, LLOYD M. McBRIDE President, United Steelworkers of America, PETER MORTENSEN President, F.N.B. Corporation, Sharon, 1979 Annual Report Natural Gas Company, Pennsylvania Pittsburgh, Pennsylvania Pennsylvania 11 Officers -1979 WILLIS J. WINN President WALTER H. MacDONALD First Vice President JOHN M. DAVIS, Senior Vice President WILLIAM H. HENDRICKS, GEORGE Senior Vice President E. BOOTH, [r., Vice President RANDOLPH PATRICK G. COLEMAN, R. THOMAS HAROLD ANDREW ROBERT CHARLES and General Counsel [r., Vice President M. SELBY, Vice President and Secretary J. SWART, Vice President Vice President J. BAZAR, Assistant CINCINNATI J. CALLAHAN, E. COE, Assistant Vice President BRANCH NORMAN J. GORIUS, A. CERINO, Senior Vice President BURTON G. sHUTACK, Vice President Vice President WILLIAM J. SMITH, Assistant ROBERT F. WARE, Assistant Vice President General Auditor VAN VALKENBURG, ROBERT and Economist Vice President Assistant Assistant Vice President Vice President and Economist OFFICE F. WILLIAMS, Assistant Vice President Vice President Vice President PITTSBURGH ROSCOE E. HARRISON, Assistant ROBERT D. DUGGAN, DONALD G. BENJAMIN, Assistant JERRY s. WILSON, Assistant Vice President Vice President Vice President BRANCH PAUL E. ANDERSON, JOSEPH 12 Vice President Assistant JEAN H. DEAN, Assistant DAVID F. WEISBROD, Vice President JAMES W. KNAUF, Assistant CHARLES Vice President Assistant Vice President and Assistant Secretary K. HAGEN, Assistant COLUMBUS E. SHOWALTER, Vice President Assistant THOMAS ROBERT KING, Vice President DONALD G. VINCEL, A. BEEKEL, JOHN J. ERCEG, Assistant JAMES H. NASH, [r., Vice President LESTER MARGRET GEORGE Vice President E. ORMISTON, OSCAR H. BEACH, [r., Assistant Vice President V. COST, General Auditor HARRY W. HUNING, THOMAS and Economist P. DONNELLY, Senior Vice President \ Vice President Assistant Assistant Vice President Vice President 1979 Annual Report -