Full text of Annual Report of the Federal Reserve Bank of Cleveland : 1981 Annual Report

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Federal Reserve Bank of Cleveland 1981 Annual Report

Contents

The President's Foreword

2

"Fragments of Transition"

4

Financial Statements

20

Directors

22

Officers

24

Couer: The bank's Superior Auenue
entrance is dominated by a colossal
bronze statue, Energy in Repose.
Sculpted by Henry Hering of New
York City, the statue represents the
great physical energy that typifies the
heauy industry of this district.
Facing page, top and bottom left:
Security, a statue carued by Henry
Hering, is one of two that flanks the
bank's main entrance on East 6th
Street. Bottom right: The Italian
Renaissance fac;ade and exterior ornamentation of the bank are made of
Etowah Georgia marble, which has a
warm pink cast.

The President's Foreword
As many of you know, 1982 is the
year of my retirement-from the presidency of this bank, from serving on
the Federal Open Market Committee,
from public life in general. I have
reaped many benefits from my eleven
years as president of the Federal Reserve Bank of Cleveland, and I have
learned much from the many people
who have touched my life and my work.
This bank has undergone numerous
changes in the past eleven years, as
have depository institutions and the
economy in general. We at the Federal
Reserve Bank of Cleveland have been
able to meet the changes, and the challenges therein, because of the diligence of our many capable employees, of whom I am proud and
most appreciative. I am also mindful of
the continued support of our member
banks and the interest of our new
constituents from the broader fi nancial community.
Far-reaching changes have occurred
in the structure of this nation's financial markets. Statewide banking organizations have been permitted in Ohio
since January 1979, and recently
enacted legislation indicates similar
developments in the other states of
the Fourth District. The pace of
change has outdistanced the legislative and regulatory framework
governing the production of financial
services. Markets, once local in
orientation, are increasingly linked to
developments and forces that are
national and international in scope.
The thrust of electronic technology is
evident everywhere- in wire-transfer
systems, automated clearinghouses,
and computerized terminals and
automatic teller machines backed by
centralized data-processing facilities.
Money market mutual funds,
operating outside the rules that
constrain commercial banks and other
depository institutions, enable ready
access to market-determined interest
rates. Credit markets also are under
heavy pressure to change. The
current problems of the savings and
loan industry, for example, will force

2

new approaches to mortgage lending.
Many of the changes in financial
practices have been piecemeal, and
many have been long overdue; indeed,
some were being discussed when I
came to this bank in 1971.
A number of the changes that have
occurred in my presidency have had
special significance to the Fourth
District. In some cases the significant
impacts have been troublesome.
Structural changes in economic
activity have lessened the region's
dependency on manufacturing. Our
steel, rubber , and automotive industries have seen their competitive
positions erode in a world of global
competition and shifting economic
activity, depressing economic growth
and curtailing employment. Many
major industrial facilities that once
were headquartered in the district
have relocated, and new firms with
new products are not being created
rapidly enough to revive the district's economy.
Because of the slowdown in the
Fourth District's economy, more and
more of our residents have migrated
to the West and the South, and fewer
and fewer new arrivals have come to
take their place. Migration patterns
reflect not only a desire for greater
employment opportunities, but also
for less e xposure to urban congestion,
deteriorating school systems, and
crumbling infrastructure. Continued
population shifts may add to the
burden of supporting the elderly, the
less skilled, the less able and may
further challenge the capacity of the
district to attract new industries and
reverse the region's economic decline.

Willis J. Winn

The problems facing the Fourth
District are serious, but they are not
insurmountable. Several efforts
recently have begun to take up the
difficult challenge of determining ways
and means of attracting new
industries, restoring competitive
balance in long-established industries,
and supporting expansion in those indus·
tries that have moved against the tide.
At the same time pressing human problems
and the problems of urban centers
have been addressed more purposefully than they were even a few years
ago. I am pleased to have participated
in some of these efforts, and while I
fully recognize the long road that must
be traveled, I am satisfied that a good
beginning has been made. Some
results are already apparent-the city
of Cleveland has been brought back
from the brink of financial ruin to a
position of greater fiscal stability.

Beyond this, I can see a new spirit of
cooperation among the people of the
Fourth District-people in business, in
labor, in the professions, and in government-that is the essential cornerstone of continued revival. I shall
watch these efforts unfold with anticipation of a full blooming of the
promise that justifiably has been made.
The state of our educational institutions is a matter of concern to
me . In my youth and throughout most
of my career, the importance of our
educational system was taken for
granted. Our expectations were high,
and, viewed in any realistic historical
perspective, they were well-satisfied .
Any serious explanation of the miracle
of U .S. economic performance must
recognize the skills, ingenuity, and
diligence of our populace. Experts
may debate the problems of our educational system and their significance,
but several things seem obvious to
me. Increasing numbers of "graduates" lack basic reading, writing, and
mathematical skills. The environments
of our inner-city schools do not contribute to learning. Public and private
school systems are having serious
financial problems. These problems
are in one sense a reflection of those
of society at large. Yet, more serious
to me is the seeming loss of commitment to an educational system that is
not merely adequate but top quality.
Failure to recognize the overwhelming
importance of adequate but efficient
investment in human beings will create
future problems that eventually will make
those of today seem insignificant.
Restructuring in the district's economy, and indeed throughout much of
the industrially mature North, represents a composite of long-term forces
coming to a head while we are trying
to unwind the inflationary spiral that
has distorted economic activity nation-

wide. Two recessions in back-to-back
years-unprecedented in businesscycle annals-have exacerbated the
longer-term adjustment process.
These contractions, serious in themselves, combine with long-term problems to accentuate economic distress
in the district. They also can change
the focus of policy efforts from the
desirable long-term path of transition
to a short-term path of quick relief
and simplistic solutions. It is always
tempting to react to immediate concerns in anticipation that, once they
are overcome, the business of achieving long-term objectives can resume
without lost ground. This generally is
not possible-the effective pursuit of
long-term objectives requires constant
diligence. Nowhere is this more true
than in our efforts to combat the related problems of inflation and slow
productivity growth. In the past 15
years, productivity growth has
declined from nearly 4 percent per year
to less than 0.5 percent per year. Over
the same period, the rate of inflation
has risen from under 2 percent per
year to over 13 percent. Our macroeconomic policies must lay firm
groundwork for resolving these issues
if the Fourth District and the nation
are to move into a new era of prosperity.
Monetary policy is a key component in any anti-inflation strategy,
balanced with a sound fiscal policy.
The Federal Reserve System is under
tremendous pressure to change the

course of monetary policy, to adopt a
different battle plan. Some would persuade us to abandon the fight against
the ever-spiraling inflation rate that
has fragmented the American
economy, redistributed our income
and wealth, and decimated our balance
sheets. Yet we do not seek simply
recovery from recession, but transition to an economic environment of
reduced inflation, higher productivity
growth, and a more efficient allocation
of resources. It is unlikely that any
policy, or combination of policies, can
succeed in quickly achieving all of
these objectives. We must be willing
to take small steps-and have the
patience to build on these small, but
often catalytic, steps.
Periods of transition are often fragmented, difficult, and painful to those
who are enveloped in the day-to-day
creation of change. Change does not
come about easily, whether in industry or finance, whether in the dis trict or in the nation-perhaps
because institutions, like people, seem
to find comfort in that which is familiar. Yet change we must-to allow
room for growth and opportunity for
the new. Out of the fragments of transition, we shall build a more efficient
and rational financial structure, a
stronger economy, a better nation.

Willis J. Winn
President

March 11, 1982

3

Fragments of Transition
1981-A Year of Transition
This past year brought frustration
and uncertainty about the economy to
all Americans as we grappled with the
second recession in as many years.
Yet, several years from now, 1981
may well be recalled as a great turning
point- a time when monetary policy
convincingly slowed the rates of
money growth and inflation. Many
problems that lie ahead - some of
which were dimly perceived just one
year ago-are now coming into
sharper focus. To understand the challenges that these problems pose, we
should look closely at the major
economic events of 1981.
Many of the economic adjustments
now under way derive from the adaptation of the economy to slower rates
of money growth and inflation- a
transition that is especially painful
because of long-standing problems of
the American economy. From 1976 to
1979, our real gross national product
(GNP) increased on average by 4.5
percent annually, accompanied by a
spiraling inflation rate ; indeed, the
consumer price index increased by 6.8
percent in 1977, 9.0 percent in 1978,
and 13.3 percent in 1979. From 1979
to 1981, real growth averaged about 1
percent per year, but the acceleration
in inflation essentially ended: consumer prices rose by 12.4 percent in
1980 and 8.9 percent in 1981. By the
fourth quarter of 1981, the rate of
increase in prices plummeted to 3.2
percent (annual rate). Monetary
expansion helped fuel the acceleration
of inflation (see charts 1 and 2) . The
money stock, measured by M-1 ,
which rose by 4.8 percent in 1974 and
5.0 percent in 1975, increased sharply

4

to 8.2 percent in 1977 and 1978. 1 Similarly, the reduction in money-supply
growth since then has been a powerful
factor in damping inflation.

Chart 1 Money Growth: M-1

..

.

.11111111

:II
Ill

II

-

I

Monetary Policy in 1981
In 1981 the Federal Reserve continued the deceleration of moneysupply growth that it began two years
earlier. The Federal Open Market
Committee (FOMC) of the Federal
Reserve System targeted an increase
of 3.5 percent to 6.0 percent in M-1
growth for 1981, after allowing for the
shifts in funds associated with the
nationwide introduction of negotiable
order of withdrawal (NOW) accounts.
At the same time, the Reagan administration announced its firm commitment to a gradual slowing in the
growth of money and credit. The year
thus began with a reassuring policy
consensus on the importance of continued reduction in money-supply
growth, a consensus that lent credibility to monetary policy for 1981.
The actual growth of M-1 as reported between the fourth quarters of
1980 and 1981 was about 5.0 percent.
After allowing for the NOW-accountrelated shifts of funds from savings
accounts and other sources into
1. Rates of growth are computed fourth quarter over fourth quarter. The M-1 aggregate refers to the meas ure known as M-1B in 1980 and
1981; the aggregate includes currency, demand
deposits at commercial banks, travelers'
checks, and other checkable deposits such as
negotiable order of withdrawal accounts, automatic transfer service accounts, and credit
union share draft balances.

.

II

'74 '75 '76 '77 '78

I

'79 '80 '81

SOURCE: Board of Governors of the Federal
Reserve System.

checkable deposits , M-1 rose by about
2.3 percent in 1981, slightly less than
the lower bound of the target range.
The broader M-2 aggregate rose by
9.5 percent, somewhat above the
upper end of its prescribed 6.0 percent to 9.0 percent target path.
The general level of interest rates
must necessarily be high when the
underlying rate of inflation is high and
expected to remain so. In the money
markets, however, short-run influences have pronounced effects. Both
interest rates and money-supply
growth behaved unevenly in 1981. A
shortfall from the M-1 target-three
months of slow growth- was followed
by a resumption of more rapid money-

Chart 2

Money Growth: M-2

Pe rce nt

'74

'75

'76 '77

'78

'79

'80

'81

SOURCE: Board of Governors of the Federal
Reserve System.

supply expansion in the second
quarter. Interest rates fell initially, as
the decline in shift-adjusted M-1 necessitated a reduction in discount-window
borrowing. As money-supply growth
accelerated in March and April, it
became increasingly apparent that effective growth of the narrow M-1 aggregate was understated. Cashmanagement innovations-particularly
increased use of money market mutual
funds and overnight repurchase agreements (RPs) for transactions
balances-enabled more efficient use
of money as conventionally measured.
Furthermore, rapid expansion in the
M-1 aggregate was accompanied by
acceleration in the growth of M-2,
which carried that aggregate above
the upper bound of its target range .
The reserve paths set under the
money-control procedure began to
constrain the growth of reserves , and
interest rates rose, quickly regaining
the peak levels reached at the beginning of the year.

In its mid-year reconsideration of
1981 money targets, the FOMC took
into account the effects of cashmanagement innovations by indicating
that it found M-1 growth near the 3.5
percent lower end of the target range
appropriate . At the same time, the
economy had slowed considerably
from its rapid first-quarter advance,
and M-1 began to fall below the lower
end of the target range . Starting in
July, higher short-run money-growth
targets were adopted to achieve the
year-end objective of 3.5 percent.
Money-supply growth began to accelerate in October, and by year-end the
M-1 aggregate was close to its target
range.
As was stated in this bank's 1980
Annual Report, money-supply growth
during short periods of time is influenced by many developments, often
temporary in character. Changes in
money-control procedures might well
help smooth short-term fluctuations in
money, but such gains probably are
not large. Also noted in this bank's
1980 Annual Report was our belief
that improvement of the control procedures was appropriate. While we
take no pride in the unevenness in
money-supply growth in 1981- or in
the accompanying financial-market
fluctuations- we would like to note
that there were no large sustained
deviations from the target ranges. The
procedures operated throughout the
year both to cushion shortfalls and to
limit overshoots when they developed.

The economy was vulnerable to
reduced money growth, stemming
from a sharp increase in the use of
credit in the 1970s-both absolutely
and relative to total spending. Total
funds raised in U.S. credit markets
averaged about 15 percent of GNP in
the first half of the 1970s and nearly 20
percent in the late 1970s (see chart 3).
The correction of this trend has been
slow and is still incomplete, although
significant progress has been made .
Total credit extended in the last two
years declined to 16.5 percent of GNP
on average , as high interest rates
limited the demand for borrowed
funds . An important part of this development was the changing attitude
toward debt usage by consumers to a
more conservative, more realistic base
than shown in the 1970s.

Chart 3 Credit Market Borrowing
and GNP
Perce nt

'66

'68

'70 '72 '74 '76

'78 '80

SOURCE : Board of Governors of the Federal
Reserve Syste m.

5

noninflationary real output growth
increasingly more difficult to achieve
(see Part II of this report for a detailed
discussion of productivity growth).

The 1981-82 Recession

Grocery stores deposit food coupons
with their banks, which in turn deposit them with the Federal Reserve.
After the coupons are verified, the
depositing bank's reserve account is
credited, and the U.S. Treasurer's
general account is charged.

6

Adapting to reduced money growth
is made difficult by some long-standing
imbalances in our economy. More than
a decade of persistent and generally
accelerating inflation- and the expectation of more to come-altered the
spending and saving habits of households, businesses, and governments.
Fundamental changes in energy
markets and prices contributed to
these problems by necessitating difficult adjustments in consumption and
in the capital stock. Productivity
growth has virtually ceased, making

By the third quarter of 1981, the
economy again had slipped into recession, compounding the pain of correcting inflation and long-standing
economic imbalances with short-run
slack. The 1981-82 recession does not
seem unusual when measured against
past recessions. It seems reasonable
to expect the declines in production
and employment, from peak to
trough, to be comparable with, or
perhaps slightly more severe than,
post-World War II recessions on average. In brief, this would mean a
decline in real GNP between 2.5 percent and 3.0 percent from peak to
trough. We should not, however,
ignore several peculiarities of the current recession-the second recession
in two years. The level of real GNP
prior to the recession was not
significantly higher than prior to
the 1980 recession. Consequently, it
represents a significant failure to reestablish sustained noninflationary
growth. Moreover, financial and
regional conditions accompanying
this recession differ from those of
past experiences.
Financial strains and illiquidity are
typical features of recession. Some
strains are perhaps more severe in the
current episode, and others less; while
some relief may lie ahead, financial
strains are likely to persist throughout
this year and into the next. Corporate
liquidity has been seriously eroded,
both by the current recession and by
the growing reliance on short-term
debt that began in the late 1970s.
The agricultural sector currently is
experiencing a level of financial distress that is perhaps more severe than
at any time since World War II. Lower
farm-product prices, rising production

This gilt sheaf of wheat ornaments
the ceiling of the bank's main lobby.

costs, and weakened demand in both
domestic and export markets have
cut net farm income in half in real
terms since 1979: Land prices and
farm asset values not only have
stopped rising but currently are substantially below levels of recent years.
In the consumer sector flow-offunds information suggests an improvement in consumer balance-sheet
conditions over the past year- an
improvement that stems almost entirely from a sharp retrenchment in
the use of credit. Although this improvement is one of the bright spots
of the current situation, consumer
asset holdings probably have become
less liquid, particularly because of the
disruption in housing markets.
Thrift institutions caught with asset
portfolios of low-yielding mortgages
are experiencing severe operating
losses. Declining net worth of such
institutions has resulted in a wave of
reorganizations and mergers. These
problems are not likely to disappear
unless interest rates decline significantly, and there are few convincing signs of such a decline.
Historically, residential construction
has been a highly cyclical sector.

Housing expenditures declined
sharply from 4.1 percent of GNP in
1978 to only 2.8 percent in 1981. Not
only are housing markets very weak,
but there is ample reason to believe
that the decline in prices of existing
homes has been far more pronounced
than conventional measures indicate.
Strong competition in the capital
markets for savings, the deterioration
in the financial condition of the
traditional mortgage lenders, and the
changing role of housing as an asset
all suggest that the housing sector is
not likely to rebound as strongly as it
normally has in past recoveries.
Another unusual aspect of the 198182 recession is that it is interwoven
with increasingly serious structural
problems in many once flourishing
industries and regions of the country.
These problems and the adjustments
to them are far more than cyclical in
character, and they will not end with
the recession. A growing number of
important industries face mounting
competitive pressures, as foreign
competition and disproportionate
increases in domestic wages and costs
have made many facilities marginal.
The Fourth Federal Reserve District is
replete with examples of such painful
adjustments and dislocations. Plant
closings and shifts in the loci of production facilities have become commonplace throughout the district's
steel, automobile, and rubber industries. For more than a decade,
employment growth in Ohio has fallen
significantly behind national growth
(see chart 4), and unemployment

Chart 4 Total Employment,
United States and Ohio

'70 '71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81

SOURCE: Bureau of Labor Statistics.

rates are roughly one-half again higher
than the national average. Weak labor
markets and growing recognition of
the need to re-establish a competitive
position in large manufacturing industries (such as automobiles) have
prompted substantial changes in labor
contracts-explicit and implicitbetween employers and employees.
Whether the changing attitudes evident in labor-management relations
will contribute to a reduction in inflation and a restoration of competitive
advantage for facilities in this region is
still an open question. Even if lower
labor costs stanch dislocations in production, some industries will be relatively smaller in the 1980s than they
were in the 1970s. In short, the 1980
and 1981-82 recessions have intensified structural adjustments that either
were inevitable or already under way.

7

Fiscal Policy in 1981
Another important aspect of the
current economy is the dramatic shift
in federal fiscal objectives in 1981.
While it is difficult to put these fiscal
changes into perspective, we shall
identify three separate but related
objectives in the fiscal package. The
first is a serious effort to alter
long-established trends in the federal
budget by reducing the size of the
overall federal sector relative to the
private economy. A second thrust is
to shift resources away from rapidly
growing civilian programs toward
national defense. These far-reaching
fiscal changes coincide with a third set
of actions designed to encourage
private savings and investment to help
restore productivity growth; these
actions collectively will be labeled
"tax reductions."
The schedule of tax reductions
enacted in 1981 will continue to come
into play this year and next. Lower
personal tax rates increase disposable
personal income. More favorable tax
treatment of income from retirement
plans and capital gains is designed to
shift income from consumption
toward saving. A liberalized capital
depreciation schedule and investment
tax-credit incentives already are operating to increase corporate cash flow
and ultimately to expand business saving. Over time, these tax changes can
help shift the economy toward
improved saving and investment, and
thereby help provide a base for noninflationary economic growth. Although
the changes in fiscal policy include
strong incentives for such a shift,
transitions of this sort are extremely
difficult to accomplish and require
time and patience. And, of course ,
there are limits to what fiscal change
can accomplish.
The 1981-82 recession has greatly
complicated the fiscal situation .
Recessions enlarge deficits , because
tax revenues fall and outlays rise in
response to higher unemployment.
The deficit now expected for the current fiscal year will be significantly
8

larger than last year's, which is probably desirable . The deficit will act to
cushion the economy as it declines. The
tax reductions scheduled for July will
enlarge disposable incomes and help
spur recovery from the recession.
The deficits that loom large for 1983
and beyond, however, must be dealt
with, as they threaten our hard-won
reduction in inflation. The deficits
suggest such large federal demands
for funds in the capital markets as to
impede private investment and a
healthy flow of saving into housing
and consumer durable-goods purchases. Such strains are not new in
the capital markets. The reduction in
the growth of money and credit in
1980 and 1981 was accompanied by a
sharp increase in the credit demands
of the federal government (see chart
5). Indeed, government-related borrowing accounted for about 42 percent of total credit-market borrowing
in 1981.
The preoccupation of capital
markets with the U.S. Treasury's current and prospective large borrowing
requirements kept capital-market
interest rates at record-high levels
throughout 1981. Between September
and December, three-month Treasury
bill rates declined by 4 percentage
points, and commercial paper rates by
nearly 5 percentage points; Aaa bond
rates declined by only 2 percentage
points. Moreover, even that modest
decline resulted in a prompt responsea surge in the volume of long-term
financing sought by corporate
borrowers. Thus , there is little
evidence in the structure of interest
rates to indicate that bond-market

Chart 5 Government Borrowing
and Total Nonfinancial Borrowing

1966-70

1971-75

'76

'78 '80

-

U.S. Treasury

-

U.S. Treasury and agencies

-

U.S. Treasury, agencies, and
loan guarantees

SOURCES: Board of Governors of the Federal
Reserve System and Office of Management
and Budget .

participants expect the reduction in
the rate of inflation to be permanent.
Until expectations of future inflation
improve, investors will require a very
large inflation premium, and firms will
be forced to rely on short-term
borrowing despite a record-high ratio
of short-term to long-term debt.
Looking beyond the recession, continued strong demands for funds by
the federal government would collide
with the credit demands generated by
recovery in housing, consumer
durables, and business investment
and the need to restructure balance

sheets. Unless there is an implausibly
large increase in private saving (an
issue discussed in Part II of this
report), strong competition for funds
could hold interest rates high enough
to price interest-rate-sensitive private
borrowers out of the credit market.
The fiscal incentives are unlikely to
work well if they must be financed
through government borrowing in the
capital markets. An alternative is
some adjustment to the fiscal changes
introduced in 1981. Another may be
failure to carry through on the disinflation program.
These are difficult issues to face.
They are more difficult today, because
economic policy has tried to deal with
them before-and failed. During the
late 1960s and again in the 1973-74
period, economic policy attempted to
bring down the rate of inflation (see
chart 6). In each instance inflation was
reduced, but not without recession;
and with recession economic policy
became less concerned with achieving
further reductions in inflation, or even
in consolidating the progress that had
been made. Eventually, even higher
inflation and worse economic
conditions resulted. These earlier
failures explain the skepticism and
uncertainty toward monetary and
fiscal policies that seem to prevail
today.
Although inflation has begun to
subside, there is great uncertainty
regarding the permanence of this
achievement. Sensible fiscal and
monetary policies will be required to
consolidate the gains of 1981. Otherwise, the current easing in price pressures will prove again to be only
temporary-the consequence of a
slack economy. The budget projections for the years beyond the
recession do little to strengthen
confidence or to suggest that this
reduction in inflation will endure.
Because there is little inclination today
to recognize the progress that we
have made, long-term interest rates
have not begun to incorporate expectations of lower inflation in the
future.

Chart 6 Changes in Consumer Prices
December over December percent change

'73 '74 '75 '76 '77 '78 '79 '80 '81

SOURCE: Economic Report of the President,
U.S. Government Printing Office, 1981.

This pattern of interest rates is
extraordinary for a recession economy. Concerns about large and prospectively larger federal budget deficits
are a partial explanation. Doubts
about future inflation, occasioned by
past failures to achieve an enduring

reduction in inflation, also are playing
an important role in sustaining longterm interest rates. The reluctance in
financial markets to recognize the
progress made in reducing growth of
money and credit and in bringing
down inflation stems from an unwillingness to believe that this progress will
persist.
More immediately, high interest
rates create doubt about the ability of
the economy to recover from the current recession. Industries, financial
markets, and regions with particular
sensitivity to interest rates are likely to
continue to bear a disproportionate
share of the burden of reducing inflation. This leads to suggestion that the
Federal Reserve abandon plans for
gradual deceleration of the rate of
money growth during the next few
years. In 1980, M-1 targets called for
growth ranging from 4.0 percent to 6.5
percent; in 1981 the targets ranged
from 3.5 percent to 6.0 percent. The
target ranges announced for 1982 call
for an increase in M-1 from 2.5 percent to 5.5 percent. Until a less inflationary future becomes more certain,
interest rates are unlikely to decline
significantly. Past experience clearly
indicates, however, that rapid money
growth is ultimately inflationary and
incompatible with prolonged stable
economic growth. The American
people's expectations of inflation and
real growth will improve only if there
is some reason to believe that the
Federal Reserve will persevere during
and beyond the current recession.
This is especially true in an environment where productivity growth is depressed and unlikely to rebound until
longer-term commitments hold firm.

9

to determine productivity. It is not
clear how some outputs, like services,
can be identified independently of
hours worked by the provider of the
service or, in general, how factor
returns are best described in relation
to factor contributions to output.
There is even dispute over which
factors ought to be included in productivity calculations. Most productivity measures reduce to a relationship between gross output and hours
worked. An example of such a measure
is the productivity index computed by
the Bureau of Labor Statistics (BLS),
which relates gross domestic product
(GDP) in 1972 dollars to total
employee hours (see table 1).

Productivity Growth

The bank receives coins every day
from depository institutions. The coins
are weighed and dumped into open
bins, each holding as much as $25,000.
The coins then are wrapped, packaged, and sent to depository institutions.

Productivity
and Capital Formation
A basic problem obscuring
longer-term policy objectives is the
slowdown in productivity growth. Productivity is a thorny issue, not only
because of the implications of unchecked declines on future economic
activity but because the dimensions of
the problem are elusive. The simplest
task of measuring productivity growth
with reasonable accuracy poses many
pitfalls. Different researchers use different definitions of output and input

Growth rates computed from the
BLS index establish a rough-and-ready
postwar history of productivity change
in the United States, presented here
in two formats. One follows produc·
tivity growth through overlapping fiveyear intervals; the other follows productivity growth through years where
capacity utilization is high at the beginning and end of each period. Productivity growth increased in the latel 950s and early-1960s, sagged in the
late-1960s and early 1970s, and collapsed in the late 1970s. Productivity
growth in private nonfarm business
peaked at about 3.8 percent per year
in the period 1961-66, slowed
significantly between 1966 and 1976,
and was nearly zero in the period
1976-81. Productivity growth in manufacturing followed the same general
course. Because of cyclical variation
in productivity associated with
changes in capacity utilization, comparisons unadjusted for the influence
of cycles can be misleading. When

growth rates are computed between
years of high utilization (to minimize
the effects of the business cycle), peak
productivity growth in the late-1950s
and early-1960s is still apparent in
both private nonfarm business and
manufacturing, as is the productivity
collapse in the late-1970s. The slowdown between the peak and collapse
is less perceptible, and, indeed, high
productivity growth reappeared in
manufacturing in 1969-73.
Other efforts to measure productivity growth suggest the same pattern
as shown here. A gradual productivity
slowdown probably began in the mid1960s, though it was not uniform
across sectors. Manufacturing, for
example, experienced a rebound in
productivity growth in 1969-73. After

1973, the collapse in productivity is
clear-cut and striking, especially
because wide-ranging research efforts
to explain the rapid deterioration in
productivity largely have been unsuccessful. Easy answers, such as failure
to overcome measurement problems,
are difficult to support, because there
is little indication that measurement
became especially troublesome within
the past ten years. Similar objections
apply to the explanation of industrial
change-the shift in economic activity
from high-productiuity sectors (manufacturing) to low-productiuity sectors
(services)-as this shift did not accelerate in the 1970s. When the menu
of possible determinants is expanded
to include changes in resource allocation, changes in the quality of
labor inputs, changes in government
regulation and others, the net effect
may be adequate to account for
gradual decay in productivity growth,
but not for the collapse in productivity
in the 1970s. Pieces of the puzzle have
been found, but the complete picture
is unclear. 2
Straightforward investigations of the
productivity problem seek the answer
in a failure of the mechanisms that, in
the past, have supported productivity
growth. These mechanisms are the
amount of capital available relative to
labor and technological innovation.
Capital formation is perhaps the most
singular feature of America's rise from
frontier society to economic giant.
Rough measures of capital suggest the
real business capital stock increased
about ten times from the end of the
Civil War to the eve of the Great
Depression. In the mature industrial
economy, from 1929 to 1979, real business capital expanded more than three
2. There are many recent studies of the productivity slowdown. Of these, perhaps the
broadest in scope is Edward F. Denison,
Accounting for Slower Economic Growth: The
United States in the 1970s (Brookings Institution, 1979). Denison evaluates a number of factors that may contribute to the sharper decline
in productivity growth beginning in 1973 and
concludes that "what happened is, to be blunt,
a mystery" (p. 4).

times again. By 1979, the gross accumulation of real business capital
was nearly $2 trillion (1972 dollars),
larger by one-third than the year's
output of goods and services. The net
(fully depreciated) real business
capital stock was about four-fifths as
large as GNP. 3
For productivity, capital is important
relative to labor. As workers have
more and better tools to work with,
productivity rises. An index of capital
relative to labor can be constructed in
a fashion similar to the BLS productivity index. Growth rates of this index
provide rough measures of capital's
contribution to productivity (see table
2). The history charted by the capital3. Estimates of the capital stock in the United
States from 1925 may be found in John C.
Musgrave, "Fixed Capital Stock in the United
States: Revised Estimates," Suruey of Current
Business (February 1981), pp. 57-68. Historical
statistics on capital may be found in Historical
Statistics of the United States, Part 1 (Bureau
of the Census, 1975), Series F446- 469.

11

labor index provides few clues to the
productivity problem. It may even introduce new mysteries. The rapid
growth of manufacturing productivity
in the period 1961-66 occurred
despite a flat capital-labor index
(capital and labor hours both increased at about 4 percent per year).
In the 1973-79 period, when productivity growth collapsed, the annual
growth rate of the capital-labor index
did fall sharply in the nonfarm business
sector. In manufacturing, however,
the capital-labor index increased at a
rapid rate. The capital component of
the manufacturing index expanded by
about 4.2 percent per year between
1973 and 1979, while labor hours rose
by only 0. 7 percent per year. (GDP in
manufacturing grew by about 2.1 percent per year over the period.) Other
studies using more sophisticated
techniques to assess capital's contribution also find that capital may be a
part of the problem, but it does not account for the productivity collapse. 4
Technological advance, like capital,
has been an important feature of economic development in the United
States. Early technological innovations
in transportation were the springboard for industrial growth. New product developments and new production techniques further advanced
industrial growth. In relation to productivity, however, technology is difficult to quantify. If technology means
the production of knowledge through
research and development, it appears
the R&D efforts did subside in the
late-1960s, but they did not collapse in
the late-1970s. The diminution in
R&D efforts has been attributed to
several factors that emerged in the
late-1960s. These include increased
government regulation, inflation, and
4. Peter K. Clark, "Capital Formation and the
Recent Productivity Slowdown," Journal of
Finance (June 1978), pp. 965-75. A study that
assigns a more important role to capital formation after 1973 is J.R. Norsworthy, Michael J.
Harper, and Kent Kunze, "The Slowdown in
Productivity Growth: Analysis of Some Contributing Factors," Brookings Papers on Economic Activity, vol. 2 (1979), pp. 387-421.

12

greater concern of managers for the
short-run "bottom line." 5
If technology means embodiment of
existing state-of-the-art knowledge in
capital or labor, it is clear that, on the
capital side, the United States has
been slow to take advantage of what is
known, particularly with respect to
automation, but not that we have
become increasingly slow in recent
years. There are important reasons
for a slow response to automated
production-principally the perceived
threat to jobs- that are still unresolved,
even though the response to available
knowledge may be quickening. 6
If technology means ingenuity, i.e.,
the ability to identify and exploit opportunities, then we would have to
seek answers to the productivity
problem in the failure of risk-taking
behavior and leadership. Some would
argue that such failures have occurred
and that the ability to convert capital
investment into economic growth
lessened in the 1970s. In a sense this
is true. The growth of real GNP
relative to the growth of real capital
investment (called the "investment efficiency ratio") did collapse in the
1970s. 7 The perplexing issue is
that while economic growth fell away,
investment did not. It is a leap of faith
to conclude that the reason for this is
a failure of ingenuity.
5. Edwin Mansfield, "How Economists See
R&D," Harvard Business Review, November/
December 1981, p. 101.
6. "The Speedup in Automation," Business
Week, August 3, 1981, pp. 58-67.
7. New York Stock Exchange, Building a Better Future: Economic Choices for the 1980s
(Office of Economic Research, December 1979),
pp, 8- 13.

Capital Services
Contributions of capital and technology appear to be only partial explanations of the productivity slowdown. It is difficult to demonstrate
that these channels of productivity
growth abruptly malfunctioned in the
1970s, though they may have contributed to the on-going gradual decline
that began earlier. One possible extension is to consider an interaction
among capital, technology, and other
events as the basic source of distortion in productivity growth. It is not
so much the stock of capital that
contributes to productivity, but the
services the stock provides; in the
1970s a wedge may have been driven between the capital stock and the flow of
services from the stock. 8 Measures
such as the investment efficiency ratio
point in this direction. Moreover, a
trail of circumstantial evidence suggests that the energy crisis and high
inflation of the 1970s were more important than additive measures of
their impact on productivity might indicate, and government regulations
relating to pollution abatement and
safety may have a similar effect. Technology, energy, inflation, and regulation, interacting with the capital
stock, could have altered capitalservice flows, even though the capital
stock itself and the level of investment
did not deteriorate substantially.
A failure to embody state-of-the-art
knowledge in capital investment has a
cumulative effect. Over the years,
capital stock and capital services diverge, and the divergence expands
across industries. Investment is concentrated in short-lived replacement
of technologically second-rate facilities.
8. An argument along these lines is presented
by Martin Neil Baily, "Productivity and the Services of Capital and Labor," Brookings Papers
on Economic Activity, vol. 1 (1981),
pp. 1-50.

Directors and officers convene below
a portrait of Alexander Hamilton, the
first Secretary of the Treasury. Standing, 1. tor., W.H. Knoell, Richard D.
Hannan, John D. Anderson, John W.
Kessler, E. Mandell de Windt, J.
David Barnes, Raymond D. Campbell, Walter H. MacDonald, John W.
Alford. Seated, 1. tor., Willis J. Winn
and J.L. Jackson.

Investment may remain high but contribute minimally to expanded productivity growth. Inflation tends to shift investment toward short-lived equipment
and away from the integrated facilities
on the technological frontier. Energy
problems divert investment from productivity enhancement to energy conservation. Government regulation has
a similar effect favoring equipment that
increases compliance with pollution
and safety standards. In a sense, the
combination of events suggesting a
divergence between capital stock and
capital services is a measurement
problem. Information contained in
measures of the capital stock may be
less useful in evaluating productivity
growth than it once was.

Accounting for the influence of
events that may drive a wedge between the capital stock and the flow of
capital services from that stock is
difficult. 9 In the best of worlds, capital
requirements are never fulfilled.
Capital stocks continuously must be
replaced to restore worn-out facilities.
Additions to stocks are needed to provide increasing standards of living. In a
world of energy conservation, regulatory compliance, and technology
catch-up, achieving higher rates of
replacement of the capital stock
without sacrificing additions to the
capital stock may require new policy
directions to support the capitalformation process.
9. See Norsworthy, Harper, and Kunze, "The
Slowdown in Productivity Growth"; Baily, "Productivity ... "; and Peter K. Clark, "Issues in
the Analysis of Capital Formation and Productivity Growth," Brookings Papers on Economic Activity, vol. 2 (1979), pp. 428-30.

13

Saving and Investment
Capital formation, i.e., perpetually
adding and replacing capital facilities,
involves three related elements: saving
(willingness to forego current consumption), investment (making additions and replacements), and finance
(bridging the gap between saving and
investment). Saving and investment
patterns change over time, as do the
financial arrangements that channel
saving into investment. Changes may
be evolutionary, supportive of capital
formation, as in the case of financial innovations that improve the flow of
saving into investment. Changes also
may be disruptive and the cause
of concern.

Treasury securities are sold on original
issue to the public in the bank's main
lobby.

One concern related to the productivity problem is the adequacy of
the capital-formation process. The
question here is whether the level of
saving and investment can provide
capital-stock growth sufficient to
support high productivity while also
advancing energy efficiency, pollution
abatement and safety standards, and
other objectives laying claim to capital.
In the simplest sense, do Americans
save and invest enough? Adequacy
may be an empty question to those
who think market-determined levels of
saving and investment are relevant
performance criteria; yet to others,
who measure saving and investment against multiple objectives, the
issue is more troublesome. If incentives
to save and invest malfunction, suppressing levels of saving and investment, while objectives of capital formation are expanding, new policy
directions must be sought in efforts to
boost the levels of saving and
investment.

Another concern is whether interference with the capital-formation
process alters the distribution of saving
and investment in ways that retard
productivity growth. Disturbances
associated with inflation, energy
shocks, and other events may alter
the composition of saving and investment in ways deleterious to productivity without necessarily changing the
level or adequacy of saving and investment. These disturbances may require
adjustment to new realities; energy
efficiency, for example, is now a prime
consideration in capital decision
making, whereas energy use was of
less importance in the recent past. Disturbances also may impair decision
making. The effects of inflation, overregulation, and shortsightedness may
foreclose rapid technological adaptation, shift investment away from
output-producing capital formation,
and distort patterns of saving. If so,
new policy directions must focus on

rechanneling saving and investment in
a manner more compatible with
productivity growth.
The search for new policy directions
must be based on reality. What has
happened to saving and investment
and what can be done to reverse
changes that seem undesirable? The
raw material, or "sources of funds ," in
capital formation is saving. Net saving,
which provides additions to capital
stocks, is the difference between current income and current consumption.
Gross saving includes capital consumption and thus provides for replacement of capital facilities . Investment, i.e. , the "uses of funds, " is the
finished good in capital formation ; it is
the accumulation of capital assets- net
investment being the additions to the
capital stock and gross investment including replacement. Of course, saving
equals investment in the nation's accounting statements (except for statistical discrepancy). We, therefore,
may calculate saving and investment
on the same base (sources or uses).
The accounting framework that provides the broadest view of saving and
investment is the flow-of -funds accounts compiled by the Federal Reserve . This framework treats household purchases of durable goods as a
saving and investment activity just as
any other accumulation of real assets.
Only the service flow from durables is
consumption. If the "use of funds " is
the base for calculating saving and
investment, saving is determined by
the activities of households , businesses, governments, and foreign
sectors that release (or absorb) funds
for capital formation. Essentially,
funds are made available by purchasing an asset (financial or real),
and funds are absorbed by borrowing.
Investment is the summation of different real asset accumulations (see
tables 3 through 5).
Average saving rates are computed
for the same periods used in estimating productivity growth. The first set
of comparisons are based on overlapping five -year intervals between 1951
and 1981; the second set of compari-

sons refer to periods where endpoints
are years of relatively high-capacity
utilization. Each of the latter is interrupted by an economic slowdown, and
no attempt is made to adjust for differences
among these cycle interruptions.
The gross saving rate (gross saving
as a percent of GNP) in the United
States has been remarkably stable
over the past 30 years (see table 3).
From 1951 through 1981, gross saving
calculated from the flow of funds
averaged about 24 percent of GNP.
With small discrepancies this average
has been characteristic of subperiods
as well. Gross-saving-rate comparisons from the five-year intervals
between 1951 and 1981 suggest only
minor differences among periods;
averages computed between years of
high-resource utili zation, despite inter-

ruptions by recessions of quite different depth and duration, suggest the
same pattern. The period 1951-56
stands out somewhat on the high side,
but the higher rate in this period was
produced by one year, 1951, when the
gross saving rate exceeded 27 percent. Virtually all of the robust saving
in 1951 was the result of rebuilding
consumer-durable stocks, which also
had supported high saving in earlier
postwar years but did not reappear
after 1951. On the low side, the gross
saving rate approached 20 percent in
1975, when U.S. government dissaving was especially high and cyclical
pressures depressed household saving. Neither "high" nor "low" rates
have been sustained for more than a
year or two.
The net saving rate (which excludes capital consumption) has been
less stable than the gross rate . Over
the entire period 1951-81, net saving
out of net national product (NNP)
averaged nearly 9.5 percent. (NNP is
defined here to exclude capital consumption of consumer durables, hous-

15

ing, and business capital.) For the
subperiods between 1951 to 1981, the
net rate varied from 12 percent to less
than 9 percent. Cyclical fluctuations in
the economy heavily influenced net
saving rates computed between highutilization years. The steep recession
of 1973-75 and the closely spaced
recessions of 1957-58 and 1960-61 are
important factors in the relatively low
net saving rates in 1956-64 and 197379. The range of the net saving rate in
individual years was from about 15
percent (in 1951 when consumerdurable accumulation was high) to
less than 4 percent (in 1975 when
government dissaving and cyclical
pressures depressed saving). Excluding these extremes, the net saving
rate still varied considerably, reaching
highs of about 12 percent and lows of
about 6 percent on several occasions.
In recent years, net saving rates
have been relatively low, averaging
less than 9 percent since 1971. This is
about 1.5 percentage points lower
than the net saving rates of the 1960s.
Years of relatively high net saving
since 1971 have been outweighed by
years of low or mediocre performance. Of course, relatively severe
cyclical downturns contributed to a
poor saving environment in the 1970s.
Over the entire ten years, however,
other factors are involved, as underscored by the erosion of the ratio of
net to gross saving, particularly in the
later period 1976-81. Simply stated,
an increasing proportion of gross saving has come from capital consumption. There are several reasons why
capital consumption increased. Most
obviously, there was more capital to
depreciate in later periods relative to
the nation's GNP. Moreover, the composition of capital shifted toward
short-lived facilities, which depreciate
faster. Equipment (short-lived facilities) now accounts for about one-half
of the (fully depreciated) capital stock,
compared with less than 45 percent in
the 1950s and 1960s. Perhaps most
importantly, depreciation rates in-

16

creased because capital consumption
is estimated on a replacement cost
basis in the flow of funds. By lifting
replacement costs, inflation increases
capital consumption and lowers net
saving. The end result was that, in the
1970s, a higher gross saving rate was
required just to maintain the net saving rate. Because the gross rate did
not increase, the net rate fell.
To satisfy increasing demands for
capital replacement without further
erosion in the ability to add to capital
stocks may require breaking, or at
least bending, the limits imposed by
the stability of the gross saving rate. If
the gross saving rate has been largely
unaffected by the considerable economic changes that have occurred in
the U.S. economy since 1951, prospects for boosting the rate in the
1980s may be more remote than many
believe. Of course, the balance
between net and gross saving may be
improved without raising the gross
saving rate. The composition of the
net saving rate may offer some clues
to ways in which feasible policy
changes may affect saving.

Composition of Saving
and Investment
The net saving rate may be separated into saving on financial position
(portfolios), saving through real asset
accumulation (the unborrowed margin
backing the net acquisition of real
assets), and saving (or dissaving) by
governments and foreign sectors. The
first of these is measured by the acquisition of financial assets net of borrowing associated with financial market
activity (see table 4, columns 1,2). The
second is measured by total expenditures for real assets (investment), less
capital consumption, less borrowing
associated with real-asset acquisition

(see table 4, columns 3,4,5). Most borrowing (which should be interpreted
to include all external funds raised) is
associated with real-asset acquisition.
The third, government saving (dissaving), is measured by net funds
released (raised) by governments and
their agencies (see table 4, columns
6,7). Foreign sectors are treated separately (see table 4, column 8).
The components of the net saving
rate have shifted significantly over the
years. The contribution to the net saving rate from financial positions, both
of businesses and households,
increased steadily between 1951 and
1981, with the most rapid increases
occurring in the 1970s. On the other
hand, the saving margins behind realasset accumulation have declined.
Business capital accumulation, which
has always absorbed saving, reduced
the net saving rate by about 4 percentage points in the 1970s. The saving margin behind housing expenditures became negative (absorbed saving) in the early 1960s, and the negative contribution rose in the 1970s.
The saving margin behind durablegoods expenditures has been variable
but consistently positive since 1951.
This margin narrowed in the 1970s. In
all cases, external funding of real
assets rose faster than expenditures.
Except for housing, the rate of increase in capital consumption also outpaced the rate of increase in expenditures. Finally, governments have
consistently been dissavers since
1951. The rate of dissaving by the
U.S. government has risen substantially, especially in the 1970s, while the
rate of dissaving by state and local
governments has declined.
On balance, increased financial saving would have boosted the net saving
rate by 7.8 percentage points between
1951-56 and 1976-81. Changes in the
saving margins behind real-asset accumulation lowered the net saving

17

rate by 8.2 percentage points between
the same periods. Together, the U.S.
government and state and local governments further reduced the net saving rate by 1. 7 percentage points.
Changes in the composition of net
saving since 1951 have been accompanied by compositional changes
on the investment side. The net saving
rate equals the net investment rate
and investment may be separated i~to
business fixed investment, business
inventories, housing, and consumer
durable goods. These components
vary with changes in the total and also
in relation to each other (see table 5).
The 1960s provided a favorable environment for business fixed investment.
The contribution to the net rate from
business fixed investment was higher
in the 1960s than before or since, and
inventory investment also was strong.
In 1966- 71, the two business components contributed 5.3 percentage
points to the net investment rate. In
the 1970s, the composition of net
investment shifted toward housing,
which was also important in the 1950s.
By 1976-81, housing and consumer
durables contributed 5.1 percentage
points to the net rate, nearly 30 percent larger than the combined business components. The shift in the
1970s did not completely restore
household investment relative to business investment to its preeminence of
the 1950s, but much of the ground
gained by business investment in the
1960s was lost.
Although it is difficult to explain the
productivity problem in the United
States by diminished growth in the
capital-labor ratio, there are indications in the rate of saving and investment that suggest some of the problem, and its solution, may be found
here. Inadequate saving and investment are hard to support on historical
grounds. Gross saving and investment

18

Hand-crafted of Swedish iron, this
eagle adorns a cage grille in the
bank's main lobby.

relative to output have not collapsed,
or even deviated from the long-term
mean. However, if productivity growth
is largely supported by net saving and
investment, there is more concern·
the net rate did sag in the 1970s. '
Moreover, there were important compositional changes in saving and
investment in this period. Clearly, saving shifted toward financial positions
in the private sector. This is consistent with the greater financial market
opportunities afforded savers
throughout the postwar period. However, lower saving margins behind
real-asset accumulation and the larger
government appetite for funds more
than offset higher rates of financial
saving. Moreover, investment shifted
away from productivity-inducing business outlays toward housing.
Saving margins behind business
fixed investment and housing became
increasingly negative as net outlays
were narrowed by rising capital consumption adjusted for price change
and as external funding of net outlays
rose rapidly. Inflation and the tax treat-

ment of nominal capital gains and
interest payments meant that saving
margins were not necessary or desirable for asset accumulation. Greater
external funding by business was
encouraged by the reasonable presumption that repayment would be
made in cheaper dollars.
Homeowners, seeing their equity in
housing advance with inflation, could
borrow against the equity to support
other activities and deduct the interest
from taxes. Rising replacement costs
of capital contributed further to lower
saving margins behind real-asset
accumulation and reduced the net
rate of saving and investment.
The shift in investment away from
business toward households did not
mark a return to the 1950s, when
"pent-up demand" from the years of
depression and war may have
strengthened both housing and durables accumulation. Nevertheless, relative gains made by business investment in the low-inflation environment
of the 1960s were reversed.

The huge door of the bank's main
uault weighs 100 tons, yet the door is
so delicately balanced that it can be
closed manually. Currency and
Treasury and municipal securities are
stored in the uau/t.

New Policy Directions
There is no magic formula for improving the distribution of saving and
investment or for boosting their level.
Traditional policy changes, such as
lowering personal tax rates, may have
desirable distributional impacts but
not increase overall saving and investment rates. In the past, at least, gross
saving has varied little as tax rates
have changed. Going further to balance the budget (eliminate government dissaving) might remove an
obstacle and allow some increase in
the gross rate. Some analysts who
have examined the constancy of the

gross rate suggest this possibility. 10
Going still further to consider more
dramatic policy changes that remove
the tax incentives supporting consumer and mortgage credit, for example,
may also generate higher saving and
investment. Changes of this type
might boost net and gross saving rates
because of their impact on saving
margins required for the purchase of
housing and consumer durables, and
they would tend to shift investment
toward the business sector. They also
would restrict access to durables and
housing and, therefore, would be
highly unpopular. New policy directions aimed solely at improving the
distribution of investment may be effective. Incentives such as those
already legislated in the Economic
Recovery Act of 1981 are warranted,
not because they will boost overall
investment but because they will shift
investment toward the business sec-

tor, where adjustments for energy
efficiency, technological catch-up, and
regulatory compliance are part of the
productivity problem and the capital
requirement. Still, the distributional
changes in saving and investment
rates that have occurred since 1951,
desirable and undesirable, are related
to inflation. New directions in policy
aimed at improving saving and
investment performance may include
many building blocks, but a cornerstone of these efforts must be a lower
rate of inflation.
10. The stability of the gross saving rate , first
noted by Edward F. Denison, has been traced
backward to the turn of the twentieth century
by Paul A. David and John L. Scadding. David
and Scadding explain stability in the gross rate
by "ultrarational" households, which adjust their
own saving behavior to that of businesses but
not governments. Government dissaving, therefore, represents lower net and gross saving and
investment. See Paul A. David and John L.
Scadding, "Private Savings: Ultrarationality,
Aggregation, and 'Denison's Law'," Journal of
Political Economy, March/ April 1974, pp. 225-49.

19

Comparative Statement of Condition
Year ended December 31

1981
ASSETS
Gold Certificate Account
Special Drawing Rights Certificate Account
Coin
Loans to Depository Institutions
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
lnterdistrict Settlement Account
Total Assets
LIABILITIES
Federal Reserve Notes
Deposits:
Depository Institutions
U.S. Treasurer-General Account
Foreign
Other Deposits
Total Deposits
Deferred Availability Cash Items
Other Liabilities
Total Liabilities
CAPITAL ACCOUNTS
Capital Paid In
Surplus
Total Liabilities and Capital Accounts

20

1980

$805,000,000
253,000,000
38,486,707
18,590,000
662,500,183

$847,000,000
201,000,000
48,558,688

3,583,457,763
4,354,424,538
1,335,875,027
9,273,757,328
9,954,847,511
383,277,625
26,595,47~
594,580,271
(1,066,590,84'4)
$10,989,196,745

3,300,547,733
4,436,095,439
1,276,210,128

$11,861,248,083

$8,972,143,190

$9,462,594,235

1,259,039,221

1,528,685,121
-029,548,000
17,373,141

-0-

25,201,000
20,021,713
1,304,261,934
338,827,588
181,061,433
$10,796,294,145

$96,451,300
96,451,300
$10,989,196,745

202,420,000
660,240,170

9,012,853,300
9,875,513,470
478,639,333
23,994,150
708,326,686
(321,784,244)

1,575,606,262
435,038,138
197,629,548
$11,670,868,183

$95,189,950
95,189,950
$11,861,248,083

Comparison of Earnings and Expenses
Year ended December 31
1981

Total Current Earnings,
Net Expenses

Current Net Earnings
Additions to Current Net Earnings:
Profit on Foreigf) Exchange Transactions (Net)
All Other

Total Additions.

1980

$1,132,402,974
55,151,690

$,.974,469,886
48,768,768

1,077,251,284

925,701,118

-0450,960 •

7,977,852
-0-

450,960

7,977,852

Deductions from Current Net Earnings:
:;:;

'

Loss on Sales of U.S. Government Securities (Net)
Loss on Foreign Exchange Tt,ans ctions (Net)
All Other ·

Total Deductions

9,171,623
24,173,356
186,188

15,589,711
-01,506,064 .

33,531,167

17,095,775

Net Deductions
Earnings Credits Used by Depository Institutions
Assessment for 1;:xpenses of' Board of Governors
Net Earnings before Payments to U.S. Treasury

33,080,207
137,957
4,970,500
1,039,062,620

9,117,923
-05,119,700 •
911,463,495

Dividends Paid
Payments to U.S. Treasury (Interest on F.R. Notes)
Transferred to Surplus

5,756,998
1,032,044,272
1,261,350

5,666,775
905,500,670
296,050

$1,039,062,620.

$911,463,495

Total

21

Federal Reserve Bank of Cleveland Directors
As of March 11, 1982

Term expires
December 31
Chairman and Federal Reserve Agent

J.L. Jackson

C

1984

C

1983

A

1982

A

1983

A

1984

B

1982

B

1983

B

1984

C

1982

Executive Vice President and President-Coal Unit
Diamond Shamrock Corp., Lexington, KY

Deputy Chairman

W.H. Knoell
President and Chief Executive Officer
Cyclops Corporation, Pittsburgh, PA

John W. Alford
Chairman of the Board and Chief Executive Officer
The Park National Bank, Newark, OH

J. David Barnes
Chairman of the Board
Mellon Bank, N.A., Pittsburgh, PA

Raymond D. Campbell
Director
The Oberlin Savings Bank Company, Oberlin, OH

John W. Kessler
President
John W. Kessler Company, Columbus, OH

E. Mandell de Windt
Chairman of the Board
Eaton Corporation, Cleveland, OH

Richard D. Hannan
Chairman of the Board and President
Mercury Instruments, Inc., Cincinnati, OH

John D. Anderson
Senior Partner
The Andersons, Maumee, OH

Member, Federal Advisory Council, Fourth District
John G. McCoy
Vice Chairman and Chief Executive Officer
Banc One Corporation, Columbus, OH
a. Class A and B directors are elected by member banks in the district; Class C directors are appointed by the Board of Governors
of the Federal Reserve System.

22

Cincinnati Branch
Appointed bya

Term expires
December 31

Chairman

Clifford R. Meyer
President and Chief Operating Officer
Cincinnati Milacron Inc.,Cincinnati, OH

Oliver W. Birckhead
Chairman of the Board and Chief Executive Officer
The Central Trust Company, N.A., Cincinnati, OH

O.T. Dorton
Presfdent
Citizens National Bank, Paintsville, KY

Sherrill Cleland
Pre$ident
Marietta College, Marietta, OH

Richard J. Fitton
President and Chief Executive Ofiicer
First National Bank of Southwestern Ohio, Hamilton, OH

Sister Grace Marie Hiltz
President
Sisters of Charity Health Care Systems, Inc., Cincinnati, OH

Don Ross
Owner
Dunreath Farm, Lexington, KY

Board of
Governors

1983

Cleveland
board

1982

Cleveland
board

1983

Cleveland
board

1984

Cleveland
board

1984

Board of
Governors

1982

Board of
Governors

1984

Board of
Governors

1983

Cleveland
board

1982

Cleveland
board

1983

Cleveland
board

1984

Cleveland
board

1984

Board of
Governors

1982

Board of
Governors

1984

Pittsburgh Branch
Chairman

Milton G. Hulme, Jr.
President and Chief Executive Officer
Mine Safety Appliances Company, Pittsburgh, PA

William D. McKain
President
Wheeling National Bank, Wheeling, WV

Ernest L. Lake
President
The National Bank of North East, North East, PA

Robert C. Milsom
President
Pittsburgh National Bank, Pittsburgh, PA

James S. Pasman, Jr.
Executive Vice President-Finance
Aluminum Company of America, Pittsburgh, PA

Robert S. Kaplan
Dean, Graduate School of Industrial Administration
Carnegie-Mellon University, Pittsburgh, PA

Quentin C. McKenna
President and Chief Executive Officer
Kennametal Inc ., Latrobe, PA

a. Federal Reserve Bank branch directors are appointed either by the Reserve Bank's main office directors or by the Board of Governors.

23

Federal Reserve Bank of ·Cleveland Officers
As of March 11, 1982
Willis J. Winn
President

Andrew J. Bazar
Assistant Vice President

Walter H. MacDonald
First Vice President

Oscar H. Beach, Jr.
Assistant Vice President

John M. Davis
Senior Vice President and Economist

Margret A. Beekel
Assistant Vice President

William H. Hendricks
Senior Vice President

Thomas J. Callahan
Assistant Vice President
and Assistant Secretary

Lee S. Adams
Vice President and General CounselRandolph G. Coleman
Vice President

John J. Erceg
Assistant Vice President
and ,Economist

Patrick V. Cost
General Auditor

Creighton R. Fricek
Assistant Vice President

Harry W. Huning
Vice President

Robert J. Gorius
Assistant Vice President

John W. Kapnick
Vice President

Hagen
Norman
Assistant Vice President

Thomas E. Ormiston, Jr.
Vice President

David P. Jag~r
Assistant Vice President

Lester M. Setby
Vice President and Secretary

James W. Knauf
Assistant Vice President

ft

Donald G. Vince!
Vice President

Cathy L Petryshyn
Assi~tant Vice President

Robert F. Ware
Vice President and Economist

David E. Rich
Assistant Vice President
John J. Ritchey
Assistant General ~ounsel
BurtorrG. Shutack
Assistant Vice President
William J. Smith
Assistaryt General Auditor
Rob~rt Van Valkenburg
Assistant Vice President
Andrew W. Watts ••
Assistant Vice Presid~nt
John J. Wixted, Jr.
Assistar.Jt Vice President

24

Cincinnati .Branch
Robei:t E. Showalter
Senior Vice. President
Charle& A. Cei:ino
Vice Pre~ident
Jean H. bean
Assistant Vice President
Roscoe E. Harr~son
Assistant Vice Presider.it
David F. Weisprod
Assist9nt ?ice President
Jerry S. \Vilson
Assistant Vic.e President

Pittsburgh Branch
Harold J. Swart
Senior Vice Presiqent
Donald G. BenJi:imio
Vice President
Paul E. Andei:so·n
Assistant Vice President
Jo?eph P. Donne1Jy
Assistant Vice Pr~sident
Ronald J. For,d
Assist~nt \lice Presiqent
Lois A. Riback
Assistant Vice President

C~lumbus Office.Ch~rles F. Williams
Assist~nt Vi~e President

The Federal Reserve Bank of Cleveland's 1981 Annual Report
was prepared by the Research Department, Federal Reserve
Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101.

Federal Reserve Bank of Cleveland
East 6th and Superior, Cleveland, OH 44114
(216) 579-2000

Cincinnati Branch
150 East 4th Street, Cincinnati, OH
(513) 721-4787

Pittsburgh Branch
717 Grant Street, Pittsburgh, PA
(412) 261-7800

45202

15219

Columbus Regional Check Processing Center
965 Kingsmill Parkway, Columbus, OH 43229
(614) 846-7050