Full text of Annual Report of the Federal Reserve Bank of Cleveland : 1983 Annual Report

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KarenN Horn

The President's Foreword

Economic recovery blossomed, both nationally and locally, in 1983.
The Fourth Federal Reserve District's economy normally lags the
nation in recovering from a recession because of its heavy concentration of manufacturing industries. Nevertheless, strong consumer
spending in the early stages of this recovery contributed to strongerthan-usual gains in the District's automotive-related-goods industries. If our current expansion continues to support a strong investment rebound without reigniting inflation, the District's
capital-goods industries should expand employment in 1984. Stability in prices and interest rates is essential to the vitality of the Fourth
District's industries.
The first year of the current recovery was not accompanied by evidence of building inflationary pressures. Inflation seldom accelerates in the early stages of recovery, because strong productivity
growth and substantial excess capacity subdue price and cost pressures. Nevertheless, prices rose as rapidly by year-end as during the
previous year, suggesting a pause, at the least, in our progress toward
further disinflation. This is a worrisome development, given the
continued strength of the economy and the highly expansive fiscal
course of our federal government.
The achievements that we've made in reducing inflation result from
our slowing the growth of money and credit. In October 1979, this
strategy became known informally as a policy to reduce the annual
growth targets for the monetary aggregates gradually each year until
inflation was eliminated. This technique was suspended in 1982
because of financial deregulation and a dramatic change in the link
between the money supply and economic activity, namely velocity.
Financial deregulation brought about massive shifting of funds
among the various measures of money supply. Paradoxically, the
subsidence of inflation, and the consequent improved expectations
about future costs of holding money compared with other assets,
also distorted the monetary aggregates. It thus became very difficult
to define our money supply, let alone predict its growth. Now that
these complications seem to be smoothing out, we expect that
velocity will resume a more normal trend in the future and that our
previous strategy of reducing the growth targets for the monetary
aggregates will once again be consistent with disinflation.
While the Federal Reserve has made substantial progress toward its
goal to end inflation, that progress is being complicated by recordlevel federal budget deficits. As the recovery proceeds, it should
become increasingly clear that our economy cannot provide unlimited resources to meet both public and private credit demands. In
light of the hardships caused by inflation in the last decade, we

would only be fooling ourselves if we thought that the stimulus
provided by fiscal policy would be sufficient to produce the economic environment that we are seeking.
The Federal Reserve also made substantial progress in adjusting its
operations to the provisions of the Depository Institutions Deregulation and Monetary Control Act of 1980, which mandated that the
Federal Reserve price its services. In 1983, we at the Cleveland Fed
achieved the goals that we set for ourselves. The hard work of the
bank's staff was instrumental in our ability to match costs and
revenues from the sale of our services.
This bank's many accomplishments in the past year reflect the
determination and efforts of the talented individuals that are a part
of our organization. We are especially indebted to J.L.Jackson, the
Cleveland board chairman who resigned in December 1983 after
being named president of Diamond Shamrock (headquartered in
Dallas). Having served as chairman of the Cleveland board of directors since 1981,Jackson earlier served as a director of the Cincinnati
Branch and then as director and deputy chairman of the Cleveland
board. We shall miss him, and we extend to him our gratitude for his
conscientious, dedicated leadership.
We are very pleased to have as the new chairman of the Cleveland
board W. H. Knoell, who had served as deputy chairman of the Cleveland board since 1981. His skillful leadership has contributed
immensely to the bank's direction thus far in 1984.

Paul A. Vo/cker, Karen N Horn,
WH Knoell (seated)

In addition to the change in chairmen, three other directors completed their terms of service in 1983. Clifford R. Meyer (President
and Chief Operating Officer, Cincinnati Milacron Inc.) was first
appointed a director of the Cincinnati Branch in 1981 and served as
chairman of that board since 1982. O.T Dorton (President, Citizens
National Bank) served on the Cincinnati Branch board since 1981;
and Ernest L. Lake (President, The National Bank of North East)
served on our Pittsburgh Branch board since 1981. We are grateful to
our retiring directors and, indeed, to all of our directors for their
valuable service. The Fourth District has benefited tremendously
from their dedication to the central banking system.
I have now served as president of this bank for two years, and I have
found those two years to be most challenging and rewarding. I
would like to take this opportunity to extend a personal thanks to
the officers and to the rest of the staff of this bank Their dedication
and creativity made the difference in this bank's many accomplishments in 1983.
Sincerely,

Karen N. Horn
President
June 1, 1984

The Unfolding of the 1983 Recovery

In 1983, the long-awaited and oft forecast economic recovery blossomed. This recovery has turned out to be substantially more vigorous than most analysts had anticipated.
The expansion unfolded amid continued moderation in
inflationary pressures. The price indexes rose at a more
rapid pace at year-end, resulting more from special circumstances than from any worsening in the underlying
trend of inflation.
The story of the 1983 recovery can be viewed in terms of
serious problems that were defused before they developed. The objectives of monetary policy were fairly well
achieved, with due allowances for substantial uncertainties
resulting from financial deregulation. Early in the year, a
surge in money growth attended the interest-rate deregulation, followed by a period of more subdued growth.
Serious international debt problems loomed over the world
recovery, but they did not prompt the financial crisis and
instability that many analysts feared. Renegotiation of debt
and recovery in world export markets averted the crisis.
Even with these successes, some of the economic events of
1983 were disappointing. Despite much discussion of the
need for action, there was little progress toward resolving
the federal budget deficit, the economic consequences that
are its handmaidens, and the important longer-term policy
objectives. Federal credit needs were met in 1983, with no
dramatic collision in credit markets. While interest rates did
not rise significantly, they did not decline apace with the
reduction in inflation achieved in the past two years. More
worrisome is that even higher interest rates in 1983 were
averted only by factors that might not continue, such as
lagging private demand for capital and high inflows of funds
from abroad. Moreover, the need to attract foreign capital
to clear domestic markets pushed the dollar exchange rate
to record levels and helped precipitate a large, and still
growing, trade deficit. Instead of reduced domestic borrowing because of interest-rate sensitivity, crowding out
resulted from intensified foreign competition in domestic
markets and from less competitive U.S. exports in world
markets. As we contend in this annual report, it is difficult
to take an optimistic view of these dual problems in 1984
and beyond-at least until measures to redress the budget
deficit materialize. The growing demand for saving and
capital in the private sector suggests that these problems

could worsen unless remedied. The likely casualties are
productivity growth, structural change, and the badly needed
transformation of U.S. industries into internationally competitive producers. Such considerations dull the sense of
accomplishment produced by economic events in 1983.
The Blossoming of the Recovery
The 1983 recovery can be characterized as typical. Consumer durable goods, residential construction, and a substantial swing in inventory investment in the second and
third quarters provided the momentum for the recovery. By
midyear, the recovery's growing strength began to spread
into the investment sector. Aside from past cyclical comparisons, business investment rose more rapidly than one
would have expected from a strict reading of capacity
utilization and other investment indicators. The direct
public-sector contribution to the increase in spending fell
short of past recovery standards. Total government purchases of goods and services (a measure that excludes
government transfer payments) fell because of cutbacks in
federal nondefense purchases and budget constraints at
the state and local government levels.

Chart 1
Total Employment: U.S. and Ohio
Yearly averages
Index 1967 = JOO
140

130

120

110

O1970

ohio

1976

1983
United
States

SOURCES: Bureau of Labor Statistics and
Ohio Bureau of Employment Services.

Tremendous deterioration occurred in the foreign trade
sector in 1983. The merchandise trade deficit rose to
$60.6 billion in 1983, from $36.4 billion in 1982; the deficit
mounted at a $74.0 billion annual rate in the second half
of 1983. The deterioration in trade was a serious drag on
the recovery. The net export component of the GNP
accounts measured in real terms declined $20.2 billion
(fourth-quarter to fourth-quarter) last year, while the other
components of GNP rose $80.6 billion.
A decline in net exports in 1983 would not have been

surprising. Net exports usually fall in the first year of recovery, as strengthening business activity boosts the demand
for imports. The U.S. recovery in 1983 was much stronger
than the recoveries experienced abroad. The magnitude of
the deterioration in trade was nonetheless surprising. It
reflects most directly the steep rise in the U.S. dollar
exchange rate that began early in 1981 and continued
throughout last year. On a trade-weighted basis, the dollar
exchange rate in December rose 52.0 percent from its
level in 1980. The impact on the competitive position of
U.S. producers in both domestic and foreign markets has
been substantial.

Output and employment soared in 1983, accompanied
by the lowest rate of inflation since 1972. \X'hile recovery
in output from previous recession lows can be characterized as about average, output was substantially stronger
by the spring of 1983 than expected by most forecasters.
Industrial production rose 15.5 percent in 1983, and the
strength in output growth was evident across the board in
consumer goods, materials, and business equipment. Pre-

dictably, the vigorous snapback in production prompted
strong growth in employment. Nonfarm employment rose
3.3 percent (December-to-December), or 2.9 million
people (see chart 1). The unemployment rate declined
sharply, by 2.5 percentage points. The surge in employment did not, however, prevent a substantial recovery in
productivity performance. Productivity growth in the nonfarm sector of the economy expanded at about a 4.3 percent annual rate through the first three quarters of the 1983
recovery, with an even larger expansion in manufacturing.
In the final quarter of the year, productivity growth slowed
to a 1.2 percent pace. The productivity gain for the year
matched the first years of past recoveries. However, many
analysts fear that the secular slowdown in productivity
growth that has characterized economic performance for
the past decade may not have been altered by widespread
efforts to cut costs and improve efficiency

Chart 2
Measures of Inflation•
Percent change
14
12
JO
8

6
4
2

0
1976

Consumer
Price Index

1979

1983

GNP Implicit
Deflator

SOURCES: U.S. Department of labor, Bureau
of labor Statistics; U.S. Department of
Commerce, Bureau of Economic Analysis.
a. Percent changes in the CPI are
December to December; percent changes
in the GNP implicit deflator are fourth
quarter to fourth quarter.

Price Perfonnance. A review of inflation in 1983 is reassuring but also worrisome. It is reassuring to state that the
dramatic progress made in reducing inflation in 1981 and
1982 was largely maintained throughout 1983. The consumer price index rose 3.7 percent in 1983, while producer
prices rose 0.6 percent (see chart 2). The more comprehensive GNP price deflator increased 4.1 percent, not
notably different from its performance in 1982.
Improved productivity and a further deceleration in labor
compensation held the increase in unit labor cost to
0.8 percent in 1983, the smallest increase in a decade.
Growth in labor compensation per man-hour slowed to
about a 5 percent annual rate in 1983. Some of the slowing
resulted from smaller first-year contract settlements and
elimination of or reduction in cost-of-living-adjustment
benefits. The renegotiation of existing contracts, which
scaled down previously agreed-on increases in wages and
benefits, also contributed to the moderation in labor compensation growth.
While the strong foreign exchange value of the dollar
weakened U.S. net exports in 1983, it helped alleviate price
pressures in this country. A strong dollar makes import
prices more attractive to U.S. consumers. The resulting
competition in the U.S. market from foreign producers
forces domestic manufacturers to hold down costs and
prices. A strong dollar also makes U.S. goods less attractive
to foreigners, reducing associated price pressures.
Several elements oflast year's price performance were less
reassuring. The sharp declines in the inflation rates of 1981
and 1982 ended abruptly. Even a casual reading of the
statistics indicates that prices were rising more rapidly by
year-end 1983. Rather ordinary and not surprising cyclical
factors have brought at least a pause to the reduction in
inflation. Indeed, past experience suggests that further
increase in the pace of inflation in the balance of the

1. The Fourth Federal Reserve District includes all of the state of
Ohio, northern and eastern Kentuck;i western Pennsylvania,
and the northern panhandle of
West Virginia.

current business expansion would result from the growing
strength in product and labor markets. Such a tendency is
already apparent in the quickening of price increases in the
past several months. In the first quarter of 1984, the consumer price index rose 5 percent, up from a 3.8 percent
rate for the preceding 12 months; the pace of finished
producer prices increased from 0.6 percent to 6.1 percent
in the same period.
Some analysts would dismiss this price acceleration as
resulting from transitory factors, such as drought and
Payment-in-Kind-induced price increases, which have
nothing to do with the underlying inflation rate. Whether
resulting from special or more fundamental factors, these
price pressures could prove to be a precursor to the onset
of even stronger price and cost pressures during the balance of the recovery. On the other hand, the pause in
disinflation could be a prelude to further progress following the current business recovery. The outcome eventually
will depend not only on the strength of the recovery in
1984 but also on the policies followed this year and their
suitability to achieve longer-term disinflation objectives.
The Recovery in the Fourth District. I The economy of the
Fourth District lagged the national recovery in 1983, a fact
that is not surprising given the interaction between the
District's long-run structural decline and its performance
over the business cycle. Employment for the state of Ohio
bottomed out in the first quarter of 1983, rose very slowly
in the second and third quarters, and accelerated in the
final quarter. The unemployment rate for the state, while
still 2.3 percentage points above the nation's, declined
from 14.2 percent at the end of 1982 to 10.5 percent in
December 1983. Virtually all of the increase in local
employment in 1983 can be attributed to the strong
national comeback in production and sales of transportation equipment and the effects on suppliers to that industry. The thrust of the recovery in the automobile sector was
strong enough to generate faster-than-normal recovery in
Ohio's employment for the entire manufacturing sector.
Output and employment growth in other manufacturing
sectors and in construction, trade, and other service sectors
have been disappointing. Employment performance in the
first half of last year was slightly stronger than expected
when measured against past cyclical performances. Yet, by
the second half of the year, employment growth in Ohio
again began to converge with its typical recovery path. As a
result, the local recovery at the end of its first year was
average in strength and exhibited a normal lag with the
national employment recovery.

While it is difficult to sort the underlying structural problems of local industries from other influences associated
with the District's lagging performance, one particular
structural change is significant to the District's economic

recovery in 1984. Over the past decade, there has been a
large nationwide shift in the composition of investment
spending. More money is being invested in sophisticated
electronic equipment rather than in the basic capitalgoods industries, such as trucks and machinery tools. The
national share of basic capital-goods spending for equipment has fallen from about 60 percent in the early 1970s to
less than 40 percent in 1982 and 1983. This trend has not
favored the basic capital-goods industries that dominate
the Fourth District.
Chart 3

Velocity of Money Supply

Percent change
12

NOTE: Shaded areas represent
periods of recession as defined by
the National Bureau of Economic
Research.
SOURCES: Board of Governors of
the Federal Reserve System and U.S.
Department of Commerce.

a. Mean plus two standard deviations. If velocity growth were stable,
we would expect it to fall within two
standard deviations of the mean
growth 95 percent of the time.

Mean

b. Mean minus two
standard deviations.

-6
1955

2. For further discussion of the declining performance of the region's
economy, see Roger H. Hinderliter,
''Sources of Regional Growth Disparity: The Case of Ohio's Industries,"
Economic Commentary, Federal
Reserve Bank of Cleveland, December 19, 1983.

1960

1965

1970

1975

1980

Import competition is another increasingly important element in the slippage of the Fourth District economy Since
1972, imports of basic capital goods have risen more rapidly
than sales of domestic capital goods; consequently, domestic producers are losing market share to foreign competitors.
The economic research conducted by this bank strongly
suggests that structural elements are primarily responsible
for the declining performance of the region's economy. 2
Employment trends by industries since 1950 show that the
employment lag results more from a decline in the competitive advantage of Ohio's industries than from the state's
peculiar mix of industries. The effects of these structural
changes are likely to continue to be felt in 1984, despite a
more favorable cyclical performance in the investment
phase of the recovery
Monetary Policy in 1983. In recent years, monetary policy

focused on targeting the growth of monetary and credit
aggregates. At the beginning of 1983, there was much
uncertainty about the reliability of the linkage between
money and the ultimate monetary-policy objectives. Normally, values of income and wealth, and of major categories of assets, tend to move in rough parallel over suitably

defined periods of time. The velocity of a major category of
assets (the ratio of income to assets) thus tends to move in
a reasonably narrow range or, as in the case of the M-1
aggregate, has a predictable trend (see chart 3). Short-run
variations in velocity around this trend are to be expected
and, again as in the case of M-1, for cyclical and other
unpredictable reasons.

Chart 4
The M-1 Aggregate
Billions of dollars, seasonally adjusted

570
550
530
510
490

1983

1984

NOTE: Dotted lines represent long-run
target ranges.
SOURCE: Board of Governors of the Federal
Reserve System.

In recent years, the relationship between economic activity
and the M-1 aggregate departed significantly from past
trends (see chart 4). By the middle of 1982, the velocity of
M-1 was beginning to diverge markedly from past patterns.
So substantial was the deviation that achieving the 1982
M-1 target might have encouraged a continuation of the
deep and stubborn recession. The FOMC acknowledged
the velocity disturbance in the latter half of 1982 by diminishing the emphasis placed on that aggregate in implementing monetary targeting and accommodating M-1
growth above its 1982 range.
As the year 1983 began, there was no compelling evidence
to suggest an early return to a predictable relationship
between M-1 and economic activity. In fact, further distortions in the relationship between economic activity and the
various money-supply measures were imminent. Newly
authorized money market deposit accounts (MMDAs)
provided limited transactions capabilities but paid market
rates of interest above previous ceiling rates on time and
saving deposits. These new deposit instruments attracted
large volumes of funds from market instruments that had
not been included in the usual money measures. To the
extent that such shifts of balances were simple reorganizations of previously existing portfolios, they were not of
primary concern in the development of the monetary-policy
objectives. During this period of transition, the Federal
Reserve found it difficult to specify target growth rates consistent with a noninflationary economic expansion.

Initially, the Federal Reserve was in a position to accommodate the deposit shifts into the new accounts without
much risk of jeopardizing longer-term objectives. After the
lesser emphasis on the M-1 target, financial conditions
were relaxed (short-term interest rates had declined by
about 600 basis points in the second half of 1982). The
long-expected economic recovery was apparently beginning to unfold. For a time at least, open-market operations
could supply the reserves required to support the new
configuration of deposit holdings without endangering
recovery or fueling future inflation.

The monetary targets for 1983 explicitly recognized these
problems. The M-1 aggregate seemed to be especially
vulnerable to deposit shifts and thus was assigned lesser
weight in policy implementation. The broader M-2 and
M-3 aggregates were given somewhat greater weight. A
new base period was established for the M-2 aggregate,

with its target range extending from February-March to the
fourth quarter of 1983. The new point of departure was less
affected by the huge volume of funds shifted into M-2. In
effect, rebasing M-2 between the fourth quarter of 1982 and
the new base period accommodated an increase of
$114.1 billion from huge unprecedented shifts in portfolio
composition. These deposit shifts made it necessary for the
monetary policymakers to look beyond the aggregates.
These huge shifts of funds were accompanied by a relatively constant volume of discount-window borrowing and
level of the federal funds rate-a pattern that was reflected
in most other money market rates. Rapid growth of the new
accounts began to slow after the early months of 1983. In
the first quarter, for example, the growth rates for the M-2
and M-3 aggregates were 20.5 percent and 10.8 percent,
respectively; in the second quarter, the growth rates for M-2
and M-3 were 10.6 percent and 9.3 percent, respectively It
became feasible to place more emphasis on the aggregates. The M-3 growth targets based on their fourth-quarter
1982 level were retained.
Dealing with the M-1 aggregate proved to be more difficult.
The widened 4 percent to 8 percent range for M-1 made
some allowance, both for the uncertainties of financial
deregulation and the unusual velocity behavior in 1982. In
the July reconsideration of the 1983 targets, the base for the
M-1 monitoring range was shifted from the fourth quarter
to the second quarter, and the range was lifted to 5 percent
to 9 percent. These decisions, as in the earlier rebasing of
the M-2 aggregate, largely accepted the rapid growth in
early 1983 as being caused by the transitory effects of
portfolio readjustments.
The introduction of Super-NOW accounts was expected to
inflate M-1 growth with funds attracted from non-M-1 assets.
The introduction ofMMDAs (included in the non-M-1 component of M-2) was expected to deflate M-1 growth by a
flow of funds out of M-1 (NOW accounts in particular). On
balance, these substitutions were thought to offset each
other, so that measured M-1 growth should have been little
affected by these two regulatory changes. Nevertheless, in
1983 the uncertainties involved in predicting M-1 velocity
were substantial. While some analysts expected a return to
more normal M-1 velocity behavior, there was little confirming evidence of this until the end of the year.
While M-2 growth was slowing, moving that aggregate into
its rebased target range, rapid M-1 growth was continuing.
The M-1 aggregate rose at an 11. 6 percent rate in the
second quarter, compared with 12.8 percent in the first.
The behavior of M-1 could not be linked with confidence
to policy objectives. Targets for M-2 and M-3 could be set,
but the radical transformation of these broader aggregates
had also diminished confidence in their relationship to
economic policy objectives. Moreover, their controllability
also became more problematic.

Chart 5
Federal Funds and Discount Rates
Percent change
20

S 1979
1981
1983
NOTE: Shaded areas indicate period when
surcharge was in effect.

Chart 6
Net Borrowed Reserves
Billions of dollars
30

2.0

1.0

0.0

- 1.0

1979

1981

SOURCE: Board of Governors of the
Federal Reserve System.

1983

In the absence of a reliable M-1 target, it fell to the FOMC to
use M-1 and all other available financial and economic
information in reaching decisions about the appropriate
degree of reserve restraint to be maintained between
meetings. The discount rate remained at 8.5 percent
throughout the year, and the federal funds rate generally
varied within a 100-basis-point range above the discount
rate (see chart 5). This was in remarkable contrast to the
preceding three years in which, under the reserve targeting
procedure, the funds rate had changed by as many as
900 basis points during a year, and at times had exceeded
the discount rate by as many as 600 basis points. Similarly,
average borrowed reserves net of excess reserves ranged
from $377 million of free reserves to $1.2 billion of net
borrowed reserves (see chart 6). Again, this was a narrower range than in the preceding three years, when this
measure varied as much as $3.8 billion within a year.
By a small 7 to 5 margin, at its May meeting the FOMC
agreed to an increase in reserve restraint. Over the next few
months, measures of reserve restraint reflected this decision as the borrowed and free reserve positions of the
banking system tightened by about $500 million and the
average level of the federal funds rate rose by about
75 basis points to the 9.5 percent range. Interest rates
across the spectrum of instruments and maturities moved
up by comparable amounts. The FOMC's decision in May
had double significance. One was the direct impact of even
a marginal adjustment of reserve restraint on growth of
money and credit and the pace of economic recovery. The
other was the demonstration that, despite substantial
uncertainty about the reliability of monetary aggregates,
the FOMC was willing to adjust the degree of reserve
restraint when decisions based on the array of economic
indicators suggested the prudence of such an adjustment
in seeking long-run objectives. The suspension of strict
nonborrowed reserve targeting in 1982 had cut the automatic link between reserve restraint and short-run money
growth. It did not mean that the FOMC would indefinitely
accommodate whatever contour of monetary and economic growth happened to develop.
The phenomenal growth rates of other checkable deposits
ceased in August, suggesting that the portfolio adjustments
associated with deposit deregulation and new accounts
were nearing completion. M-1 growth finished the year
near the midpoint of the 5 percent to 9 percent range for
the second half of 1983, and M-1 velocity growth appeared
to be approaching rates more nearly consistent with historical experience.
Interest Rates and Capi,tal Markets. The level of interest
rates was a matter of controversy during the year, despite
their relative stability. A common perception early in 1983
was that the level of interest rates was too high to allow

anything but a mild recovery. A mild recovery would bring
only a slight reduction in idle capacity and the unemployment rate by year-end. The perception that interest rates
were too high relative to past standards, to the rate of
inflation, or to economic recovery goals was common. In
the first place, the level of nominal interest rates can be
high or low, depending on the rates of inflation expected
to prevail over the term of the instrument. Expectations of
inflation cannot be observed directly or measured well.
Whatever the level of interest rates, they were not so high
in 1983 as to preclude the growing demands for output in
traditionally rate-sensitive sectors of the economy that provided the driving force for recovery.
And Then the Thorns

Although optimistic about the vigor of the 1983 recovery,
economists are worried about other aspects of the economy. Perhaps the greatest concern is the financing of our
huge federal budget deficit. Many budget analysts now
expect the deficit to grow through the current decade and
remain in a range of 5 percent to 6 percent of GNP. During
the 1970s, the deficit averaged 2.2 percent of GNP; during
the 1960s, a decade of rapid capital accumulation, the
deficit averaged less than 1.0 percent of GNP. The financing needs of the federal sector will keep upward pressure
on interest rates. This upward pressure could hamper the
growth of the economy's interest-sensitive sectors, including housing, consumer purchases of durable goods, business fixed investment, and capital expenditures of state
and local governments.
The central issue is the adequacy of saving to finance both
public and private credit demands as the current recovery
proceeds. Although many alternative measures of saving
exist, most measures suggest that saving is not increasing at
a pace consistent with the substantial credit needs that
loom ahead. Since 1979, net saving from the household,
nonfinancial business, and state and local government
sectors has grown more slowly than the federal sector's
borrowing needs. Moreover, foreign capital inflows, which
helped finance the deficit in 1983, will become less freely
available as the worldwide recovery proceeds. As a result of
these trends, the United States might only be able to satisfy
growing federal credit demands at the expense of its
capital-stock growth. Future generations would then bear
the burden of today's deficits.
The Saving Concept. Saving is defined as the part of current

income that is not consumed. Added over sectors, saving is
equal to household income less consumption plus business retained earnings and depreciation allowances, pl us
foreign capital inflows, plus any federal, state, and local
government surpluses. Saving represents resources withheld from current consumption to build capital and ensure

3. Borrowing represents dissaving;
that is, borrowing reduces future
consumption to increase current
consumption.
4. See Flow of Funds Accounts,
Fourth Quarter 1983, Board of Governors of the Federal Reserve System.

greater future consumption.3 Aggregate saving over any
quarter or year equals aggregate investment. Changes in
economic variables such as interest rates, employment,
and income correct any tendency of the two to diverge. If,
for example, planned investment exceeds planned saving,
interest rates will rise to constrain investment demand,
reduce consumption, and encourage additional saving. In
this way interest rates force planned investment to equal
planned saving.
•
Although the broad concept of saving is fairly straightforward, measurement of the concept is fraught with difficulties. Some of these difficulties reflect measurement
problems, and some result from definitional problems.
Conceptually, economists can measure saving from current
account transactions, as income minus current expenditures. Saving also can be measured from capital account
transactions, as net investment in tangibles and financial
assets minus net increases in debt. These two approaches
will yield equal results in the absence of measurement errors
. r
and definitional problems.
Whether measured on a current account basis or a capital
account basis, saving falls out as a residual. As such, any error
in the measurement of income or consumption ( current
account basis) or in the measurement of the changes in
assets or liabilities ( capital account basis) appears in the
saving figure. The substantial discrepancies that appear
between saving estimated on a current account basis and
saving estimated on a capital account basis evidence this
measurement problem. Gross nonfinancial business saving
in 1982, for example, equaled $321 billion on a current
account basis, but equaled $263 billion on a capital account
basis.4 The $57-billion discrepancy between these two
measures is attributable largely to incomplete and preliminary information on business taxes. Similarly, foreign
capital flows measured as the negative of U.S. current
account balances equaled an inflow of $8 billion in 1982;
foreign capital flows measured on the capital account basis
in the flow-of-funds accounts amounted to an outflow of
$30 billion. The $38-billion statistical discrepancy reflects
errors in measurement. Statistical discrepancies exist in the
other sectors.
When considering a saving aggregate, we must decide
whether these discrepancies largely reflect saving ,or
whether they result primarily from errors in the measurement of income and consumption ( current account basis)
or errors in the measurement of changes in assets and
liabilities (capital account basis). We measure saving from
flow-of-funds data on a current account basis. Statistical
discrepancies are not allocated to saving.

A second aspect of the measurement problems involves
defining the relevant components of the saving aggregate._
There are a myriad of definitional questions. A major

uncertainty, for example, involves the choice between net
saving, which is available to finance additions to the capital
stock, and gross saving, which equals net saving pl us
depreciation allowances available to maintain the existing
capital stock. Although we focus on a net saving concept,
we also consider a gross saving measure. Depreciation
allowances based on tax laws could overstate capital consumption needs based on the physical characteristics of
plant and equipment, especially in the short run. These
funds could temporarily finance credit demands unrelated
to the replacement of capital.
Another definitional question involves the treatment of
household tangible assets. When a household purchases
durable goods, such as a new car or refrigerator, the household does not consume, or use up, the product immediately Durable goods are assets with a store of value that
yields a return of services over a long time. Many economists argue that the flow of services from the unconsumed
portion of such durable goods represents a form of saving.
We include household tangibles in our measure of saving.
In the long term, this stock of tangible assets is an important determinant of household consumption (and saving)
patterns. In the short term, we might exclude household
tangibles from a saving measure, arguing that they do not
represent a flow of liquid funds available in credit markets
to satisfy borrowers' needs.
Saving by Sector. Ultimately, we are interested in the total

amount of saving available to finance private and public
credit demands. The aggregate data, however, mask trends
and developments in the various sectors of the economy
important to our understanding of saving. A brief discussion of saving by sector follows.
Household saving includes net financial investment plus
allowances for tangible assets, capital-gains dividends, and
government insurance funds. In the United States, the
household sector is the largest saving sector. Total household saving has grown at a fairly steady average annual rate
of 9.3 percent since 1970. Over the years, the composition
of household saving has changed. Between 1970 and 1975,
households accumulated financial assets more quickly
than tangible assets. Between 1975 and 1979, households
slowed their acquisition of financial assets and accelerated
their holdings of tangible assets. During the earlier period,
inflation remained relatively moderate, and the public
generally believed that economic policies would bring
inflation under control. In the later period, inflation accelerated, inflationary expectations heightened, and the credibility of policymakers became strained. Returns on financial assets often fell below the inflation rate, increasing the
attractiveness of tangible assets. Since 1979, households'
accumulation of tangible assets again has become relatively less important than that of financial assets, suggest-

ing more optimistic expectations about inflation and the
wisdom of policymakers.
In contrast to the fairly steady growth of household saving,
nonfinancial business saving has slowed markedly since
the late 1970s. Between 1970 and 1979, for example, gross
business saving grew on average approximately 13.0 percent per year. Since 1979, gross business saving has grown
on average 10.4 percent per year. Much of the growth in
gross nonfinancial saving can be traced to an expansion of
depreciation allowances. Tax laws pertaining to depreciation charges generally have been liberalized over the years.
Substantial liberalization of depreciation write-offs pertaining to new capital were instituted under the Economic
Recovery Tax Act of 1981. This law should substantially
increase depreciation charges in the future as existing
capital stock is replaced with new capital.
Net of depreciation allowances, nonfinancial business
saving has fallen at a 12.8 percent annual rate since 1979,
after increasing at a 24.9 percent annual rate between 1970
and 1979. The weakness in net business saving since 1979 in
large measure could reflect the general weakness in economic activity, and renewed growth in business net saving
could be forthcoming as economic activity strengthens.
One possible measure of state and local governments' saving
equals total receipts less total expenditures. The flow-offunds accounts allocate pension funds to the household
saving sector. These funds have grown sharply since the
early 1970s. In the absence of these pension funds, state
and local governments' saving is fairly small and fluctuates
around zero. In 1983, state and local governments' saving
equaled $12 billion, but there is no reason to expect this
unusually large level of saving to persist.

Like the state and local government sector, the foreign
sector is sometimes a net saver and sometimes a net borrower. Inflows of foreign capital, measured as the negative
of the current account balance, rose sharply in 1983 to
$32 billion. Foreign capital inflows were attracted to the
United States because of the faster pace of recovery here
than in most other developed countries, higher relative
interest rates here than abroad, and fears of political
upheavals and capital controls in many foreign countries.
The inflow of foreign funds helped keep U.S. interest rates
below levels they otherwise would have attained, but the
capital flows also promoted a strong dollar exchange rate
and weakened U.S. net exports. Most economists project a
widening in the current account deficit in 1984 and 1985,
implying even greater inflows of foreign capital. At the
same time, recovery abroad will quicken, and foreign
credit demands will begin to firm. By late 1984 or early
1985, substantial increases in U.S. interest rates compared
with those elsewhere in the world, and/ or a sharp depreciation in the spot-dollar exchange rate compared with its

longer-term expected value, could be necessary to attract
additional foreign funds into the United States. The foreign source of saving consequently could prove to be
expensive and unreliable in the future.

5. Federally sponsored agencies and
mortgage pools are not included in
the federal ban-owing figures, because these agencies function as
intermediaries: they bon-ow funds
and re/end them. Federally !>ponsored
agencies and mortgage pools alter
the flow of credit from what would
occur in a free market. In 1983,
federally sponsored agencies and
mortgage pools ban-owed and relent
$68.1 billion.

In contrast to the other sectors that contribute to saving
at least periodically, the federal sector has been a net borrower of growing magnitude since 1969. This can be
directly traced to Treasury borrowing to finance ballooning federal budget deficits and net federal off-budget
spending. The concept of net federal borrowing is not
strictly equal to Treasury borrowing to finance the deficit
and off-budget spending, because the federal government
holds some financial assets.s These offsets are small, however. Net federal borrowing equaled $189 billion in 1983,
up sharply from $67 billion as recently as 1981 and $15 billion in 1970. Although much of the increase in Treasury
borrowing is associated with the economic malaise of the
recent recession years, budget analysts currently do not
expect Treasury borrowing to moderate significantly as
the economic recovery proceeds.
The Adequacy of Saving. Saving from the household,
nonfinancial business, state and local government, and
foreign sectors equals nonfederal saving and represents
funds available to finance private investment or federal
credit demands (see chart 7). Net nonfederal saving is
available to finance new additions to the capital stock or
federal deficit spending. Gross nonfederal saving equals
net saving plus depreciation allowances available to maintain the existing capital stock Because federal borrowing is
insensitive to interest rates and involves virtually no credit
risk to lenders, the federal sector generally stands first in
the queue for credit-market funds. Consequently, over
time the amount of planned private investment financed
depends on the growth of nonfederal saving and the growth
of federal credit demands.

w
I

Between 1960 and 1978, net nonfederal saving grew at an
11.5 percent average annual rate and gradually rose from
7 percent to 12 percent of GNP. Since 1978, net nonfederal
saving has leveled off, falling to 9 percent of GNP. In contrast, gross saving continued to grow by a widening margin
because of more generous depreciation allowances. For
much of the period since 1960, the federal sector's appetite for saving remained fairly subdued. Between 1960 and
1969, net federal borrowing rarely exceeded 1 percent of
GNP; over the next five years, it averaged only slightly
above 1 percent of GNP. Since 1979, as nonfederal net
saving slowed, the federal appetite for net saving rose
dramatically to almost 6 percent of GNP in 1983.
Especially during economic downturns, deficit spending
in conjunction with accommodating money growth can
benefit the economy by generating income with little pres-

sure on interest rates. Continuous and expanding deficits,
especially when the economy is growing and approaching full capacity utilization, place federal borrowing in
conflict with private credit needs. If planned private investment and federal credit demands exceed planned nonfederal saving, interest rates will rise to balance the amount
of credit demanded with that supplied; the federal sector
will crowd private borrowers out of the credit market.
Since 1979, the moderate growth in net nonfederal saving,
together with the sharp rise in net federal borrowing, has
Chart 7
Saving and the Federal Sector

Percent of nominal GNP

~ Capital consumption funds
-

Net federal borrowing

Net private investment funds

... Gross nonfederal saving
18
Net nonfederal saving
- - Net federal borrowing
12
SOURCES: Actual data-Federal Reserve Board flow of funds accounts.
Projections incorporate a Congressional Budget Office forecast of GNP
and the baseline budget deficit.

1960

1983

1989

reduced the funds available for private investment. In 1983,
net federal borrowing consumed nearly all of net nonfederal saving. According to our measures of saving, since
1979 the United States has financed its budget deficit at the
expense of net private investment.
A slowing in the growth of a nation's capital stock relative
to the growth of its labor force eventually produces a
decline in that country's productivity growth and its fullemployment ( or potential) level of output. Since the mid1970s, U.S. labor-productivity growth has slowed; since
1977, U.S. productivity has shown virtually no growth.
Although economists have not fully explained the poor
U.S. productivity performance, the most reasonable explanations relate to demographic trends in the United States
and to a failure to accumulate productive capital. An economy with a slowing productivity growth rate will become
more vulnerable to inflationary pressures. Over an
extended period of time, such an economy will suffer a
drop in its standard of living measured as the total amount
of real goods and services consumed per capita. The resulting smaller capital stocks and reduced standard of living

represent the true burden, which is passed to future generations, of financing the federal deficit. Continuous federal
deficit spending augments current consumption per capita
at the expense of future consumption per capita.6

6. To the extent that current budget
deficits reflect federal investment
spending, which benefits future generations, they should bear part of the
burden. Much of the growth in federal spending over the past decade
reflects consumption spending (e.g.,
transfer payments) instead of
investment spending.
7 See Congressional Budget Office,
An Analysis of the President's Budgetary Proposals for Fiscal Year 1985,
February 1984.

The United States could avoid the consequences of heavy
federal borrowing if the gap between net nonfederal
saving and net federal borrowing were to widen again.
To examine the prospects of such a development, we
projected net nonfederal saving through 1989 according
to its historic growth pattern. We estimated net federal
borrowing over the same period, using the Congressional
Budget Office's ( CBO) estimates of the baseline budget
deficit.7 We also used the CBO's estimates of GNP as the
denominator of the ratios. The projections indicate that
the difference between net nonfederal saving and net
federal borrowing narrows throughout the remainder of
the decade. In the absence of effective policies to reduce
the federal budget deficit, the United States could experience a ten-year period ( 1980 through 1989) characterized by a continuous and generally tightening squeeze on
the funds available to finance net private investment. In
the absence of deficit-reducing policies, real interest rates
in the 1980s could easily remain above their pre-1979 historic norm. The long-term adverse consequences of these
projections could manifest themselves in the near term as
rising interest rates, sluggish growth of residential construction and business fixed investment relative to public
and private consumption, and possibly an early end to the
current economic recovery.
Implications for Monetary Policy Given the formidable
difficulties of measuring saving, we must allow for sizable
margins of imprecision around our estimates. Yet, the general conclusion holds. Federal borrowing to finance budget
deficits has consumed an increasing share of the saving
available to finance private investment since 1979 and
could easily continue to crowd private borrowers out of
credit markets as recovery proceeds, unless actions are
taken to reduce the deficit. Hefty federal credit demands
have contributed to the unusually high level of interest
rates in recent years, and these interest-rate pressures could
become more pronounced in 1984 and 1985 as private
credit demands rise. At this point, federal deficit spending
could conflict with a monetary policy directed at preventing a resurgence of inflation.

The ability of the Federal Reserve System to promote low
interest rates in the face of heavy public and private credit
demands is severely limited. While changes in monetary
policy often can lower interest rates in the short run, over
time the monetary authority only can attempt to approximate such an objective through continuously accelerating
money growth. The price of such a policy is accelerating

inflation. Ultimately, such a policy course is self-defeating;
lenders eventuallywill raise interest rates to prevent an accelerating inflation rate from eroding the real value of their outstanding loans. In the long run, monetary policy is limited;
if society devotes more of its resources to the federal sector,
fewer resources are available to the private sector.

More Brambles in the Garden
The competition for saving between the public and private
sectors will be the major factor influencing the contours of
the current economic recovery and weighing on monetary
policy decisions. This, of course, is not the only event that
will define the monetary policy environment over the next
year or so. Monetary policymakers also will confront increasing price pressures as recovery proceeds, along with a precarious international debt situation.

I,
'I

i!i

A Pause in the Disinflation Process. Twenty years ago
policymakers optimistically believed that monetary and
fiscal policies could maintain both full employment and
price stability. Monetary policy objectives alternated
between fighting inflation and fighting unemployment. By
switching objectives back and forth between inflation and
unemployment, policymakers lost both battles. The unfortunate experience was that the Federal Reserve could not
for very long trade off a little more inflation for a little less
unemployment. Indeed, inflation rose to higher and
higher levels in each expansion period, and unemployment rose to new heights in each recession. If any trade-off
existed, it was only temporary.
The experience of the past 20 years prompts two observations. First, the Federal Reserve has limited ability to
manipulate the economy in the short run to achieve full
employment. Second, full employment cannot be achieved
on an enduring basis in an inflationary environment. A
growing realization of the difficulty of achieving short-term
economic goals, coupled with the widening awareness of
the overriding importance of any inflation-free environment, has led to a consensus that price stability over the
long run should be the central bank's primary goal. What
do we mean by price stability? In theory, it can be argued
that it does not matter whether the inflation rate is Oto
5 percent, as long as it is predictable. In practice, we have
found that a little inflation soon becomes more, and that
inflation becomes even less predictable at higher levels.
Consequently, long-run price stability might only be consistent with a zero-inflation objective.
Adjusting to high levels of inflation in the real world is not
costless, even when those levels are predictable. During
the 1970s, repeated failure to deal with inflation on a
long-term basis all but forced consumers, businessmen,
savers, and borrowers to expect future inflation to be
worse than current inflation. Eventually, the expectations

8. See Kj. Kowalewski and Michael F
Bryan, "The Outlook for Inflation,"
Economic Review, Federal Reserve
Bank of Cleveland, Winter 1984,
pp. 7-22.

of higher future inflation became entrenched in financial
markets, and investors built a substantial inflation premi um into interest rates. Accelerating inflation led to more
uncertainties and risks in financial markets, as well as to
distortions in saving and investment. Some economists
believe that these distortions may have eroded the stock of
productive capital, lowered worker productivity, and contributed to even higher unemployment rates. Although
there are certainly many who would disagree, economists
increasingly have come to realize that the central bank can
do little to maintain full employment except provide an
economic environment that includes a sound financial
system and a stable price level.
Since 1979, the Federal Reserve has clearly established and
acknowledged that its primary responsibility is to end
inflation, and we have made much progress toward that
goal. Inflation as measured by the GNP implicit price deflator has fallen from about 9 percent in the early 1980s to
about 4 percent in 1983. Inflationary expectations, so rampant in the mid- to late-1970s, also have cooled, and policymakers have earned renewed credibility with respect to
their resolve to prevent inflation. Nevertheless, the battle
against inflation is not over. Inflation hovers around 4 percent to 5 percent. Although this is a substantial improvement from recent experience, it is still unacceptably high
in view of historical averages in the United States and
long-term price stability
A renewed challenge to the Federal Reserve's disinflation
policy will come in 1984 and 1985 as the pace of economic
activity quickens, reducing excess capacity in the economy
and placing cyclical pressures on prices. The overall
amount of excess capacity in the economy can be approximated by the gap between actual and potential GNP 8
Potential GNP attempts to measure the total amount of
goods and services that the economy could produce if it
continuously operated at full employment. Because it is an
imprecise measure, price pressures can exist while actual
GNP remains far below potential. Given these caveats, the
measure is useful in gauging the intensity of overall price
pressures. At the trough of the last recession, i.e., the fourth
quarter of 1982, the GNP gap equaled approximately 8 percent of potential GNP During the first year of the current
recovery, real GNP grew 6.2 percent, roughly equal to the
average first-year recovery pace experienced throughout
the post-World War II period. While the GNP gap narrowed
to 5.4 percent of potential GNP, sufficient excess capacity
existed to avoid cyclical pressures on prices. Few industries experienced capacity problems last year. Assuming
that in 1984 the rate of real growth would be approximately
equal to last year's growth rate, the GNP gap would close to
about 2.7 percent of potential. In late 1984 and early 1985,
the economy will approach the capacity limits implied by
the potential GNP measure. To avoid a sharp acceleration

in inflation as actual GNP approaches potential GNP, the
economy's growth rate must slow to a pace equal to the
growth rate of potential GNP, i.e., 2.5 percent to 3.0 percent
annually. Such a growth rate is compatible with the longterm growth in the labor force and capital stock If real
economic growth continued above this pace, prices would
rise rapidly.

The International Sector. A further depreciation of the U.S.
dollar in foreign-exchange markets also could add to price
pressures in 1984 and 1985. The dollar continues to exhibit
strength in exchange markets, remaining well above levels
that many economists regard as consistent with long-term
equilibrium in the U.S. foreign trade balance. Consequently,
many foreign-exchange analysts expect a depreciation of
the dollar's exchange value this year and again next year.
Depreciation of the dollar tends to raise the dollar prices of
internationally traded goods. Almost immediately following a depreciation of the dollar, prices of U.S. imports rise.
As import prices rise, consumers of these goods will shift to
domestic substitutes, eventually exerting upward price
pressures in these markets. Similarly, a dollar depreciation
reduces the foreign-currency price of U.S. exports and
increases the foreign demand for U.S. goods. The dollar
prices of U.S. export goods then begin to rise. These price
pressures also ripple through closely related markets. Although dollar depreciation exerts pressures on the prices
of traded goods in the absence of an accommodative monetary policy, these price pressures would not translate into
a more broadly based inflation.
Another major thorn in the economic outlook is the international debt situation. The world's developing countries,
excluding members of the Organization of Petroleum
Exporting Countries ( OPEC), currently have debts outstanding totaling about $600 billion. U.S. banks hold
roughly 15 percent of this debt. The economic climate of
the past few years has left many developing countries
unable to meet the interest and principal payments on
their original loan agreements. Consequently, many countries have entered into negotiations with their creditors to
extend repayment schedules. Major disruptions or delays
in meeting interest payments on debts could shake confidence in the U.S. banking system, producing contractions
in both domestic and international lending. Such developments could reduce international trade and slow the
pace of the economic recovery worldwide.
As of June 1983 (latest data available), the 190 U.S. banks
reporting to a lending survey of the Federal Financial Institutions Examination Council had claims on non-oil developing countries of nearly $104 billion, an amount equal to
139 percent of the capital of these banks. Although many
regional and small banks entered the international lending
market in the 1970s, international lending remained the

domain of large banks with expertise in the area. The nine
largest U.S. reporting banks held 62 percent of the total
reporting bank claims on developing countries as of
June 1983. This amount equaled 212 percent of the large
banks' capital. As recently as December 1977, the nine
largest banks had loans outstanding to non-oil developing
countries equaling only 163 percent of their capital.
U.S. banks have concentrated their international lending
on a relatively small group of middle-income developing
countries. In June 1983, Argentina, Brazil, Mexico, and Venezuela accounted for 63 percent of the total U.S. reporting
bank claims, with Brazil and Mexico accounting for 20 percent and 24 percent, respectively. Consequently, U.S. banks
are vulnerable to adverse developments in these countries.
We can only speculate on the effects of a major disruption
in the servicing of international loans. Much depends on
the extent of the disruption and the response of regulatory
agencies, commercial banks, shareholders, and depositors. Extensive loan write-offs could adversely affect banks'
profits, shareholders' earnings, and banks' capital. Banks
must maintain capital against loans, although the required
amount is only a small share of total loans. Consequently,
any reduction in capital could restrict bank lending and
raise interest rates. Higher interest rates and reduced lending could slow domestic economic activity, but the extent
of this effect would depend on the monetary policy of the
Federal Reserve System.
Major debt-servicing disruptions also could greatly restrict
the ability of borrowing countries to conduct international
trade. Disruptions could leave the debtor nation unable to
obtain foreign credit to import vital commodities. This in
turn could impinge on the debtor nation's ability to produce other goods for domestic consumption and for
exportation. Without exports, these countries would find it
difficult to acquire foreign exchange. Moreover, the developing countries are important markets for developed
country exports. The contraction of these markets could
further reduce economic growth and employment in the
United States.

Monetary Policy for the Longer Term. The Federal Reserve
is in the middle of a long-term program to end inflation by
gradually slowing the growth of money and credit. When
this program began, it was informally defined as a policy to
reduce the annual growth targets for the money supply
gradually each year until inflation was eliminated. In 1982,
our effort to lower the money targets gradually each year
was set aside. A series of well-documented events led to a
sharp shift in the linkages between the money supply and
total spending in the economy. Massive shifts of funds
among the various measures of the money supply-the
monetary aggregates-distorted the growth of those
aggregates, particularly of M-1. Other factors, such as the

sudden decline in inflation and improved expectations
about the future cost of holding money relative to other
financial assets, also played a role. The FOMC agreed to
de-emphasize the M-1 policy target and to place more
emphasis on the broader monetary aggregates. As events
since have proven, that decision did not mean that the battle
against inflation was over. It was merely an acknowledgment that events had occurred that made the preannounced
targets inappropriate-indeed, inconsistent with our policy
to end inflation gradually

In retrospect, we believe that the surge of M-1 in the first
half of 1983 and the subsequent slowdown resulted from
the effects of the ongoing deregulation of the financial
markets and lower inflation itself These transition effects
appear to be ending. Barring further substantial changes in
depository regulations, we expect the linkage between
money and spending to be restored. This does not mean
that velocity would become perfectly predictable, or even
that the relationship between the monetary aggregates and
nominal GNP would become any more stable and predictable than it was in earlier times. While we have no guarantee of how M-1 will behave in the future, the last three years
have shown that the Federal Reserve can achieve its disinflation goal using annual monetary targets, even in the
presence of enormous distortions to the aggregates. This
success is predicated on the Federal Reserve's freedom to
deviate from its targets when appropriate. An analysis of
the last four years shows that the Federal Reserve did not
achieve its original monetary targets; yet, in each of those
four years, the deviations from target can be most accurately
interpreted as reflecting offsetting deviations in the velocity of money from trend.

Comparative Financial Statements
For years ended December 31

Statement oJ Condition
Assets
Gold certificate account ............................... .
Special drawing rights certificate account .................. .
Coin ............................................ .
Loans and securities:
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 ......................... .

TOTI\L LIABILlTIFS

744,000,000
302,000,000
48,352,029
18,640,000
589,824,645
3,592,053,786
4,133,263,304
1,224,664,884
8,949,981,974
9,558,446,619
497,489,683
26,959,141
622,823,041
(1,322,017,967)

3,899,095,369
3,787,905,782
1,233,156,486
8,920,157,637
9,460,903,123
313,757,611
27,423,020
471,760,022
(693,739,261)

.
.
.
.
.
.
.
.

659,000,000
302,000,000
36,861,081
28,550,000
512,195,486

TOTAL ASSETS
Liabilities
Federal Reserve notes ................................
Deposits:
Depository institutions ...............................
Due to other Federal Reserve banks (collected funds) ........
Foreign ..........................................
Other deposits ....................................
Total deposits ....................................
Deferred availability cash items .........................
Other liabilities .....................................

1982

1983

$10,577,965,596

$10,478,052,546

$ 8,831,155,014

$ 8,822,691,792

1,094,302,278
0
10,950,000
21,855,551
1,127,107,829
275,111,613
141,856,440

1,050,526,845
326,044
_ 15,750,000
41,324,088
1,107,926,977
214,983,382
134,157,795

$10,375,230,896

$10,279,759,946

Capital accounts
Capital paid in ..................................... .
Surplus ........................................... .

101,367,350
101,367,350

99,146,300
99,146,300

TOTAL CAPITAL ACCOUNTS ........................... .

202,734,700

198,292,600

TOTAL LIABILlTIFS AND CAPITAL ACCOUNTS .............. .

$10,577,965,596

32
l

$10,478,052,546

Earnings and Expenses

1983

Current earnings
Interest on loans ........ .. . . ........... . .... ... .. .. . .
Interest on government securities ..... ........ . .......... .
Earnings on foreign currency ........ ... ... . ...... . ..... .
Revenue from priced services ....... . ................... .
All other earnings ....................... ............ .
Total current earnings ....................... ........ .
Current expenses
Current operating expenses ....................... ..... .
Cost of earnings credits ....................... ........ .
Total current expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CURRENT NEf EARNINGS
Profit and loss
Additions to current net earnings:
Profit on sales of government securities .................. .
All other additions ................. . ........ . ....... .
Total additions. . . . . ....................... ........ .
Deductions from current net earnings:
Loss on foreign exchange transactions ................... .
All other deductions .. . ....................... ...... .
Total deductions ....................... .... . ...... .
Net additions or deductions .............. . ............. .

2,378,047
924,706,072
19,987,049
30,342,356
286,732
$ 977,700,256

7,476,261
1,047,056,094
32,333,016
23,999,246
318,797
$1,111,183,414

54,278,653
6,514,992
60,793,645

59,109,587
1,996,859
61,106,446

$ 916,906,611

$1,050,076,968

1,336,302
14,243
1,350,545

33,309,709
45,472
33,355,181

32,004,636)

5,730,169)

5,187,600
8,472,971
13,660,571

4,639,900

$
$

5,533,134
707
5,533,841
11,220,916
43,094
11,264,010

Assessments by Board of Governors
Board of Governors expenditures ....... . .. . ............. .
Federal Reserve currency costs 1 . • . . . . . . . . . . . . . . . . . . . .... .
Total assessments by Board of Governors ................. .
NEf EARNINGS AVAILABLE FOR DISTRIBUTION ............. .

$ 871,241,404

$1,039,706,899

Distribution of net earnings
Dividends paid . .. ...... .. ................... . ......
Payments to U.S. Treasury (interest on Federal Reserve notes) ....
Transferred to surplus ....................... .........
Total distributed ....................... ............

6,018,002
863,002,352
2,221,050
$ 871,241,404

.
.
.
.

l . Prior to 1983, Federal Reserve currency costs were reported in current operating expenses.

1982

5,891,495
1,031,120,404
2,695,000
$1,039,706,899

Federal Reserve Bank
of Cleveland Directors
As ofJune 1, 1984

Directors, Cleveland office: Seated, l tor., Richard D. Hannan,
Chairman W H Knoell, William A Stroud Standing, l to r.,
Deputy Chairman E. Mandell de Windt, Raymond D. Campbell,
J. David Barnes,John W Kessler
Cleveland

Chairman and Federal Reserve Agent
WH. KNOELL

President and Chief Executive Officer
Cyclops Corporation, Pittsburgh, PA
Deputy Chairman
E. MANDELL DEWINDT

Chairman of the Board
Eaton Corporation, Cleveland, OH

DAVID BARNES

Chairman and Chief Executive Officer
Mellon Bank, Pittsburgh, PA
RAYMOND D. CAMPBELL

President and Chief Executive Officer
Independent State Bank of Ohio, Columbus, OH
JOHN R. HALL

Chairman of the Board and Chief Executive Officer
Ashland Oil, Inc., Ashland, KY
RICHARD D. HANNAN

Chairman of the Board and President
Mercury Instruments, Inc., Cincinnati, OH
JOHN W KESSLER

President
John W Kessler Company, Columbus, OH
LEWIS R. SMOOT, SR

President and Chief Executive Officer
The Sherman R. Smoot Company, Columbus, OH
WILLIAM A STROUD

President
First-Knox National Bank, Mount Vernon, OH

Directors, Cincinnati Branch: Seated, l tor., Sherrill Cleland, Vernon]
Cole. Standing, l to r., Richard J Fitton, Sister Grace Marie Hiltz,
Don Ross.

Directors, Pittsburgh Branch: Seated, l. tor.James S. Pasman,]r., Chairman Milton G. Hulme, Jr., Robert S. Kaplan. Standing, A Dean
Heasley, Robert C. Milsom, G. R. Rendle, Milton A Washington.

Ci11ci1111ali

Pittsburgh

Chairman
ROBERT E. BONI
President and Chief Operating Officer
Armco Inc., Middletown, OH

Chairman
MILTON G. HULME, JR.
President and Chief Executive Officer
Mine Safety Appliances Company, Pittsburgh, PA

SHERRILL CLEI.AND
President
Marietta College, Marietta, OH

A. DEAN HEASLEY

RICHARD J. FITTON
President and Chief Executive Officer
First National Bank of Southwestern Ohio, Hamilton, OH

ROBERT S. KAPlAN
Professor, Graduate School of Business
Harvard University, Boston, MA
and Professor, Industrial Administration
Carnegie-Mellon Universif)J, Pittsburgh, PA

CLEMENT L. BUENGER
President and Chief Executive Officer
The Fifth Third Bank, Cincinnati, OH
VERNON J. COLE
Executive Vice President and Chief Executive Officer
Harlan National Bank, Harlan, KY
DON ROSS
Owner
Dunreath Farm, Lexington, KY
SISTER GRACE MARIE HILTZ
President
Sisters of Charity Health Care Systems, Inc.
Cincinnati; OH

Member, Federal Advisory Council, Fourth District
JO HN G. McCOY
Chairman of the Executive Committee
Banc One Corporation, Columbus, OH

President and Chief Executive Officer
Century National Bank & Trust Co., Rochester, PA

ROBERT C. MILSOM
President
Pitzsburgh National Bank, Pittsburgh, PA
JAMES S. PASMAN, JR.
Vice Chairman
Aluminum Company of America, Pittsburgh, PA
G.R. RENDLE
President and Chief Executive Officer
Gallatin National Bank, Uniontown, PA
MILTON A. WASHINGTON
President and Chief Executive Officer
Allegheny Housing Rehabilitation Corporation
Pittsburgh, PA

Federal Reserve
Banko/
Cleveland
Officers
Asofjunel, 1984

KAREN N. HORN
President

TERRY N. BENNETT
Assistant Vice President

WILUAM H. HENDRICKS
First Vice President

JAKE D. BREIAND
Assistant Vice President

LEES. ADAMS
Senior Vice President
& General Counsel

ANDREW C. BURKLE, JR.
Assistant Vice President

RANDOLPH G. COLEMAN
Senior Vice President
JOHN M. DAVIS
Senior Vice President
&Economist
THOMAS E. ORMISTON,JR.
Senior Vice President

THOMAS]. CALIAHAN
Assistant Vice President
& Assistant Secretary
JILL GOUBEAUX CLARK
Assistant Counsel
IAWRENCE CUY
Assistant Vice President

DONALD G. VINCEL
Senior Vice President

JOHN]. ERCEG
Assistant Vice President
&Economist

ANDREW J. BAZAR
Vice President

ROBERT J. FAILE
Assistant Vice President

DONALD G. BENJAMIN
Vice President

ROBERT J. GORIUS
Assistant Vice President

PATRICK V. COST
General Auditor

NORMAN K. HAGEN
Assistant Vice President

CREIGHTON R. FRICEK
Vice President

DAVID PJAGER
Assistant Vice President

JOHN W. KOPNICK
Vice President

CATHY L. PETRYSHYN
Assistant Vice President

EDWARD E. RICHARDSON
Vice President

ROBERT W. PRICE
Assistant Vice President

JOHN J. RITCHEY
Vice President &
Associate General Counsel

JAMES W. RAKOWSKY
Assistant Vice President

LESTER M. SELBY
Vice President
& Secretary
SAMUEL D. SMITH
Vice President
ROBERT F. WARE
Vice President
JOHN J. WIXTED, JR.
Vice President
MARTIN E. ABRAMS
Assistant Vice President
OSCAR H. BEACH, JR.
Assistant Vice President
MARGRET A BEEKEL
Assistant Vice President

DAVID E. RICH
Assistant Vice President
SUSAN G. SCHUELLER
Assistant Vice President
& Assistant General Auditor
BURTON G. SHUTACK
Assistant Vice President
WILUAM J. SMITH
Assistant Vice President
MARKS. SNIDERMAN
Assistant Vice President
& Economist
EDWARD J. STEVENS
Assistant Vice President
&Economist
ROBERT VANVALKENBURG
Assistant Vice President
ANDREW W. WATTS
Assistant Counsel

Cincinnati Branch
CHARLES A. CERINO
Senior Vice President
ROSCOE E. HARRISON
Assistant Vice President
DAVID F. WEISBROD
Assistant Vice President
JERRY S. WILSON
Assistant Vice President

Pittsburgh Branch
HAROLD]. SWART
Senior Vice President
RAYMOND L. BRINKMAN
Assistant Vice President
JOSEPH P. DONNELLY
Assistant Vice President
LOIS A RIBACK
Assistant Vice President
ROBERT B. SCHAUB
Assistant Vice President

Columbus Office
CHARLES F. WILLIAMS
Vice President

Federal Reserve Bank
of Cleveland

MAIN OFFICE
East 6th and Superior
Cleveland, OH 44114
(216) 579-2000

CINCINNATI BRANCH
150 East 4th Street
Cincinnati, OH 45202
(513) 721-4787

PITTSBURGH BRANCH
717 Grant Street
Pittsburgh, PA 15219
(412) 267 -7800

COLUMBUS REGIONAL
CHECK PROCESSING CENTER
965 Kingsmill Parkway
Columbus, OH 43229
(614) 846-7050

This annual report was
prepared by the Research
Department, Federal
Reserve Bank of Cleveland, PO. Box 6387, Cleveland, OH 44101. For additional copies of this report,
contact the Public Information Center, Federal
Reserve Bank of Cleveland
(216/ 579-2047).

I 'botoRrafJl() •:
Architecture- Ruffin Cooper, Jr.
Portraits- Barney 1axel

Full text of Annual Report of the Federal Reserve Bank of Cleveland : 1983 Annual Report

FRASER