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News reports of actions by the Federal Reserve System to contain
inflation help to shape the public's views of the central bank. The pen
and ink creations of editorial cartoonists staffing the nation's newspapers and magazines are another source of commentary on economic
issues. While they do not necessarily present an accurate reflection
of the Fed and its policymaking decisions, the works of three editorial
car toonists serve as illustrations for an essay on how Federal
Reserve policy promotes growth, beginning on page 5 of this report.


President's Foreword


Federal Reserve Policy
Promotes Growth






Comparative Financial


Small Bank Advisory
Council and Business
Advisory Council


A mid significant political and economic developments that made


1994 a watershed year for the nation, the economy of the Fourth
Federal Reserve District saw important gains and was among the
strongest in the United States.
Ratification of the North American Free Trade Agreement and U.S.
approval of the General Agreement on Tariffs and Trade promise
expanded access to international markets for manufacturers and
consumers. These pacts are of particular importance to the Fourth
District, where a large industrial sector is already benefiting from
strong foreign demand for capital goods.
Regional manufacturing output continued to surge in 1994, largely
as a result of increased exports and production efficiencies. Capital
goods and steel producers operated at near capacity, and automotive suppliers continued to post solid production gains.
Among several indicators of economic health, employment growth
accelerated nationally and within our region. As the U.S. jobless
rate fell to 5.4 percent, Ohio's year-end unemployment rate of 4.3
percent was the state's lowest in 20 years . The latest available
rates for other areas of the region were Kentucky, 4 .8 percent;
Pennsylvania, 5.9 percent; and West Virginia, Z 7 percent.
The robust regional economy is a major factor in helping the financial institutions of the Fourth District remain among the strongest
and most profitable in the nation. Banks in the District experienced
a third consecutive year of superior earnings, with many reporting
record profits. Many institutions had solid loan demand for both
business and consumer credit, and commercial banks reasserted
themselves in the credit process.

The Federal Reserve Bank of Cleveland opened a new chapter in
its history in 1994 with the groundbreaking for a new operations
center, the first phase of a four-year construction and renovation
program. This first significant alteration or addition since the 1923
completion of our headquarters building will pravide space and
state-of-the-art technology needed for us to serve the region well
into the next century. The new operations center adjacent to our
main building will house cash, check, and wire transfer operations.
Keeping our internal focus on quality, cost
efficiency, and customer service in 1994, we
maintained our status of having the lowest
unit costs of all 12 Federal Reserve Banks
and made further progress toward achieving the Bank's "value -added" supervision
objective. As part of the Bank's mission to
provide high-quality, value-added services
in all aspects of its operation, our banking
supervision strategy seeks to enhance the
already strong condition of Fourth District

institutions through


responsiveness and greater opportunities for
education on regulatory topics.
During the year, we expanded Electronic
Delivery Services, established internal and
external quality task forces, created a special
customer services unit for large institutions,
and completed a complex relocation of data
processing applications to the Federal
Reserve Automation Services in Richmond ,
Virginia .
The Bank's efforts to ensure fair and equal
access to credit for all of our citizens were
aided by launching the Cleveland Residen tial Housing and Mortgage Credit Project. A
model for other communities, this initiative
brings together all components of the home
mortgage market in a program of involveSandra Pianalto, first vice president; A. William Reynolds, chairman;
Jerry L. Jordan, president; and G . Watts Humphrey, Jr., deputy chairman.

ment and discovery designed to eliminate
potential discriminatory practices in the
home-buying process.


Throughout the year, the Federal Reserve's actions to contain inflation made news. Unfortunately, many reports of monetary policy
moves gave the erroneous impression that the Fed is willing to sacrifice economic growth. In fact, reducing inflation in order to maintain the purchasing power of currency is a primary goal of the central
bank because it will promote economic growth. Indeed, the Fed's
efforts to restore confidence that the value of the dollar will be
maintained in the future may, with hindsight, prove to have been a
key contributor to the economy's rapid growth in the last year or
two. We present a discussion of the relationship between price stability and prosperity in an essay beginning on page 5 of this report.


None of the year's accomplishments would have been possible
without the guidance and support of our 23 directors, who represent a variety of banking and business interests from throughout our
District. Special thanks are extended for the participation of the
members of our Business and Small Bank Advisory Councils.
I especially want to thank six directors who completed their terms of
service in 1994 -

Bill McConnell (chairman and chief executive

officer, The Park National Bank) and Doug Olesen (president and
chief executive officer, Battelle Memorial Institute) for service on the
Cleveland Board; Ray Bradbury (retired chairman, Martin County
Coal Corporation) and Marv Stammen (president and chief executive officer, Second National Bank), who served on the Cincinnati
Board; and Dave Dahlmann (president and chief executive officer,
Southwest National Corporation) and Jack Piatt (chairman, Millcraft
Industries, Inc.) for their service on the Pittsburgh Board. Messrs.
McConnell, Olesen, and Piatt have served on their respective boards
since 1989. We are pleased that Dave Dahlmann will continue to
serve the District as a new member of the Cleveland Board .
Finally, I am grateful to the officers and staff of the Fourth District
for their energy, resourcefulness, and commitment in making 1994
a successful year.

Jerry L. Jordan

Federal Reserve Policy Promotes Growth
T he u.s. economy performed in stellar fashion in 1994. Employment increased by more than 3 million,
economic output grew rapidly, and inflation edged further below 3 percent. After the disappointing
pace of expansion in 1992 and 1993, last year's prosperity was very welcome indeed.
Unfortunately, even as more Americans were working, earning higher incomes, and producing more
goods and services, there was uneasiness about where it would all lead. Some analysts expressed concern that the robust growth would lead to accelerating inflation. Others said that policy actions to
restrain inflation would (or should) halt the growth. Still others said we would end up with the worst of
worlds-stagflation-rising inflation and falling output and employment.
Such views suggest substantial disagreements about the causes of economic growth and inflation and
about the appropriate role of the Federal Reserve. The debate over these issues is crucial to assessing
the prospects for the economy during the next few years.
At the core is a fundamental disagreement about the natural tendencies of a market economy. The
dominant view since World War" has been that without actions by governments or central banks, the
economy will be deficient in creating jobs, generating incomes, and fueling economic growth. That is
not our view. On the contrary, we believe a market economy has an inherent tendency to expand.
Economic policies should create the conditions in which the natural incentives of a capitalist system
foster the creativity and ingenuity necessary for innovation and capital accumulation.
Our view of the relationship between monetary policies and the economy can be summarized by four
key points: 1) the Fed seeks to restrain inflation in order to promote economic growth in the conviction
that inflation hampers growth; 2) growth is not sacrificed in order to maintain price stability; 3) monetary policy is the only tool for preventing inflation; and 4) even 1994's low rate of inflation is too high for
the nation's long-term good.

What to Believe?

T"f: ff;O

N umerous media reports last year

F-~I{~ fU'.TES

OF FE"'It,·,


,., TIlt..T

~ ~ROl'




~===::t:::!::3, ~

asserted that the Federal Reserve's
actions in 1994 were designed to
slow the economy to head off inflation . For example, The New York

Times stated in September that
" ... reports [of vigor in housing and
employment] fanned fears that overly rapid growth could revive inflation."l At the same time, The Wall

Street Journal reported that "the

II\,...i'$ 1t() 8"'0 ...
I 'M

LO~ING ro~


\N"~ ~~E '{OU T~I(ING To 00-


Fed's current goal is to slow the
economy to an annual growth rate
of about 2.5 percent to avoid a significant acceleration of inflation."2
Actually, they had it backwards :
Monetary policies a re geared to
creating less inflation so that there


will be more growth .
Monetary policies of the Federal
Reserve reflect the belief that main-

rates, faster real economic growth,

geared to the "avoidance of either

more employment, and higher
sta ndards of living.

woul d provid e a monetary climate

taining price stability does not

inflation or deflation of prices ...
favorable to the effective operation

require high interest rates and less

We agree with Milton Friedman,

growth . On the contrary, a stable
purchasing power of the dollar will

one of the most celebrated econo-

ingenuity, invention, hard work,

mists of this century, who has

promote lower long-term interest

argued that a monetary policy

and thrift that are the true springs
of economic growth."3

of those basic forces of enterprise,


Conditions for Growth

Governments depend on their
monetary authorities to uphold the

L ong-run economic growth occurs
when there are more or better-

value of their currencies. In the

trained workers, when the stock of

signed this responsibility to the

capital (such as buildings and ma-

Federal Reserve System, an inde-

The Employment Act of 1946 requires the federal government
to pursue "maximum employment, production, and purchasing power.,,4 Responsibility for
achieving the goals of the Act
was not assigned to any specific
government entity or to the Federal Reserve System. Rather, the
Act expressed appropriate goals
for policymakers to strive for
using the knowledge and tools
available to them.


The Employment Ad was amended by the Full Employment and
Balanced Growth Act of 1978,
also known as the HumphreyHawkins Act. That law requires
the federal government to pursue
several national goals, Ineluding " ...full employment and production, increased real Income,
balanced growth, a balanced federal budget, adequate productivity growth improved trade
balance ... and reasonable price
stability.•. ."5
Like its predecessor, HumphreyHawkins states only general goals
for the government rather than
assigning Individual responsibilities for achieving those goals.
However, Humphrey-Hawkins is
more specific in that it requires
the President to establish economic goals consistent with eventually achieving total and adult
unemployment rates of 4 percent and 3 percent, respectively.
In contrast to the generalities of
the Employment Act and the
Humphrey-Hawkins Act, a 1977
amendment to the Federal Re serve Act assigns some specific
objectives to the Federal Reserve.
The Fed is required "... to promote
eHectively the goals of maximum
employment, stable prices, and
moderate long-term interest
rates.,,6 It is left to the Fed to decide how best to pursue those

United States, Congress has as-

chinery) is growing, when technol-

pendent central bank (see "By Act

ogy such as software is improving,

of Congress" at left) . Providing a

and when business enterprises become more efficient.

reliable unit of money is the primary way in which the Federal

Economic growth is natural because

Reserve supports the natural process of economic grawth. When the

most people want to improve their

value of the currency is altered by

standard of living. To do so, they seek

either inflation or deflation, the

education and work skills for them-

economy cannot perform at its

selves and their children; they save

optimum level.

and invest in order to obtain higher
incomes in the future; they acquire

Defining Inflation

tools, buildings, and machinery to
increase their ability to produce
goods and services for themselves

I nflation mea ns that the purchasing power of a dollar is shrinking

or to sell to others; and they invent
new technologies and work meth-

over time. This occurs when the

ods so they can produce more with

purchased with money rises-that

less. These are activities that require

is, when the general level of prices

no prompting from government.

moves up. The price level is usually
measured by an index, such as the

average of all prices of the items

The necessary role of government

Consumer Price Index, which is a

is to provide an environment in
which the natural process of eco-

weighted average of prices for a

nomic commerce is unimpeded .
Government should both protect

large number of goods and services that are desired by con-

and respect private property rights,

sumers. Not all prices rise during
inflation, and those that rise do not

institute courts to help enforce con-

all increase at the same pace.

tracts, and provide patent and
copyright protections. It should provide for national defense and inter-

Inflation is a

persistent rise in the

general level of prices, not a tem-

nal law and order as well as guar-

porary increase in the price of one

antee civil liberties such as freedom
of speech, press, religion, petition ,

or even several goods. For example,
when last year's freeze in Brazil

movement, and association. Govem-

damaged the coffee crap, the pros-

ment should uphold economic liber-

pects of a smaller harvest led to a

ties such as freedom to invest and

rise in coffee prices. But the higher

to choose one's field of study, occu-

prices will hold only until the next

pation, and employment. Finally, it

normal-sized crop comes to market.

should provide a reliable unit of
money for people to use in their

Moreover, even if the rise in coffee

personal and business transactions

prices is not reversed, it will not lead
to a general decline in the value of

-a unit whose purchasing power

money. It is only when the overall

remains constant over the years
and decades and whose value is

have inflation-a sustained slide in

neither eroded by inflation nor
augmented by falling prices.

price level

continues to rise that we

the purchasing power of money.
As in the case of coffee, a higher
price for one item cannot continuously raise the average of all prices.

This is true even if the price increase
results from greater demand rather
than from reduced supply. For example, suppose the producer of an
individual product raises the price
in response to greater demand.
People who still buy that higherpriced product then have less available to spend on other products .
The demand for other products
drops, so prices of those products
also decline (or rise less than they
would otherwise), leaving the overall price level unchanged . This must
happen unless the public's nominal
purchasing power is increased
through excess money creation .

ular way to express Friedman' s
view is that inflation is the result of
"too much money chasing too few
goods." Nevertheless, periods when
goods are produced at a rising
pace, such as 1994, often generate concerns about inflation . But it
is not the more rapid economic
growth that causes the value of
money to fall. At fi rst glance, it
seems strange to even think that
expanding the output and availability of goods can cause the
prices of goods to rise. Increases in
the supply of particular commodities such as wheat or computer
chips obviously reduce their prices.

goods will fall. Only if policymakers
have allowed the money supply to
expand at an excessive pace will
price increases become perma nent. Without excessive monetary
growth, long-run price stability can
be achieved desp ite trans itory,
cyclical ups and downs in prices of
specific commodities, manufactured goods, and services.
The mistaken belief that growth
causes inflation stems in part from
confusion about real growth and
nominal growth . Real growth is an
increase in the physical volume of
goods and services produced. Nominal growth, on the other hand, is
an increase in the dollar value of
output, whether that rise involves
greater real output, a higher price
level , or both . If nominal growth
exceeds real growth, inflation is
occurring. However, achieving price
stabil ity does not require less real
growth . Instead, it requires that
spending does not persistently rise
faster than the rate of real growth .
Central bank actions to combat
inflation are not intended to limit
real output growth, but to prevent
nominal growth that would result in
a rising price level. For a further
discussion of misperceptions surrounding growth and inflation, see
"No Trade-off" on page 8.


Because price increases for individual items cannot compel increases
in the money supply, they cannot
cause inflation . As a former presi dent of U.S. Steel Corporation once
put it, "Steel prices cause inflation
like wet sidewalks cause rain ."?
Inflation' s One Cause
M ilton Friedman described infla tion as "always and everywhere a
monetary phenomenon."B His point
is that inflation cannot occur without excessive growth of the money
supply. That is, only when a nation's
central bank permits money to be
created at a pace faster than people
want to add to their money bal ances do we see inflation . The pop-

Clearly, expanded production is
not the sole focus of concern .
Rather, if increased production and
employment are the result of accelerating demands for current output, excessive demands may spill
over into rising prices. When manufacturers respond to increased
orders and sales by stepping up
production, they incur higher costs,
capacity constraints may become
binding, and the prices of many
goods and services may rise. These
effects, however, are only temporary and cannot lead to sustained
inflation . In fact, at other times,
demand for current output will
grow more slowly and prices of
many raw materials and final

Rising interest rates also do not
cause inflation . The relationship is
the reverse: Inflation (or, more precisely, expectations of inflation) can
cause interest rates to rise when
lenders demand compensation for
the expected erosion in the value of
money. Inflation premiums in interest rates add to the cost of borrowing , but only enough to offset the
loss of purchasing power that is
expected from inflation .
Higher interest rates add to production costs, but those cost increases are not inflationary, just as


other production cost increases are

If, however, the falling foreign-

Inflation hampers market efficiency

not inAationary. Rising interest costs

exchange value of the currency re-

pressure producers to restrain other

flects a domestic inAationary proc-

by reducing the clarity of price signals. When a price or wage rises

production costs, to reduce profit
margins, or to raise prices. If some

ess, other prices will not head

during inflation, it is often unclear

producers do boost their prices,

lower. Nevertheless, the declining
exchange value of the dollar is not

how much, if any, of the increase is
relative and how much merely re-

some other prices must fall so th at

the cause of the inflation. Instead,

the average of all prices remains

dollar depreciation against other

flects the falling value of money.
This lack of clarity reduces the effi-

unchanged - unless monetary policymakers allow the money supply

currencies is one of the channels
through which inAationary domes-

make decisions about occupations,

to expand at an inAationary pace.

tic monetary policy actions are
reAected in a higher price level.

Another common misperception is


ciency with which individuals can
employment, and consumption and
with which businesses can gauge output levels, materials, and equipment-

that a falling foreign-exchange

Inflation Hampers Growth

value of a currency can cause inAation . When the dollar depreciates

I nflation depresses real economic

against foreign currencies, as it did

growth over time by causing ineffi-

against the Japanese yen and the
German mark during 1994, price

ciency in the marketplace, discour-

labor ratios. To reduce these inefficiencies, individuals and businesses
incur the costs of shopping around
for current price information .

aging saving and investment, and
shifting investment toward short-

When policymakers tolerate even
tainty about future rates of inAation

plained earlier, increases in indi-

lived capital goods. Moreover, because inAation that is unanticipated

vidual prices do not cause inAation.

redistributes wealth, people and

the risks of making investments, so

Unless monetary policy itself is in-

businesses divert productive re-

flationary, those individual price
increases must be offset by declines

sources from growth activities in

lenders respond by adding a risk
premium to interest rates. In turn,

increases for some imported goods
are likely to follow. However, as ex-

(or smaller increases) in other prices.

modest rates of inflation, uncerprevails. That uncertainty increases

attempts to protect themselves
from landing on the losing end of

the higher rates suppress invest-

the redistribution.

capital goods.

ment and shift it toward short-lived


Many people mistakenly believe

makers want a IIHle less unem-

nomic pollcymaklng. Everyone

that society must choose be-

ployment, they can "buy" it by

agrees that many factors affect

tween a stable price level and

accepting or inducing somewhat

such a natural rate over time.

rapid economic growth-that

more rapid inflation. But such

the two cannot co-exist. Some

trades are at best a short-run,

While most experts accept the

acquire this notion merely be-

transitory phenomenon.

notion of a short-run trade-off

Today, few economists think that

ployment, such a phenomenon

between inflation and unem-

cause it is repeated so often.

there is any long-run trade-off

occurs only when people are

growth causes inflation can be

between Inflation and unem-

surprised by an Increase In

traced back to the Ideas that

ployment. In fact, countries that

inflation. This means that even

there Is a trade-off between the

try to

a transitory trade-off between

inflation rate and the unemploy-

trade-off usually wind up with

Inflation and unemployment can

ment rate, and that the unem-

both inflation and unemploy-

be exploited only with ever-

ployment rate will be low only

ment. Instead of a trade-off,

higher rates of inflation. And,

when growth is rapid.

most economists believe that,

when people come to expect this








conceptually, there is a "nat-

constant acceleration, they can

When people believe in a trade-

ural" rate of unemployment and

be surprised, if at all, only with

off between inflation and unem-

that no amount of inflation can

inflation rates that mushroom



permanently hold unemploy-

into hyperinflation. Clearly, per-

economic policymakers must

ment below such a rate. Unfor-

sistent attempts to artificially

choose between twin evils and

tunately, even if the natural rate

depress unemployment through

accept the combination that is

theory Is correct, no one knows

an inflationary monetary policy

most tolerable for the nation.

where that level is with suffi-

would inflict long-term damage

According to this view, if policy-

cient certainty for use in eco-

on the economy.



Furthermore, inflation interacts with

this point, it helps to distinguish
between the level of output and
the standard of living. Imagine an

Saving is discouraged because

increase in thefts in an economy

evaluating the relative merits of
fixed- versus adjustable-rate mort-

interest earned on savings placed

that is already fully utilizing its productive resources. There is likely to

gages, trying to guess how interest
rates would change in the future-

even though part of the interest

be a decline in production of some

in essence, trying to forecast how

is merely an inflation premium,

other goods and services so that

much inflation there would be .

in financial assets is fully taxable,


Although these activities are sensible for the people who engage in



mortgage in the last few years
spent a substontial amount of time

the U.S. tax code to discourage
saving and investment even more.

them, they are socially wasteful
because they merely alter the pattern of inflation's redistribution of
wealth, rather than adding to
wealth . Even if this activity involves
no reduction in the measured level
of real output, the standard of living will be lower because some
productive resources will have to be
redirected. In addition, there will
be less growth over the long run
because some growth-enhancing
resources must be diverted to these
inflation-hedging activities .
The challenge of preventing all of
these anti-growth consequences of


intended to compensate for erosion

production of door locks and car

of the purchasing power of princi-

alarms can be increased. Although
there is no change in the level of real

pal. Investment is discouraged be-

inflation is assigned to central
banks . The Federal Reserve and

cause business profits are overstated and therefore overtaxed - the

output, the standard of living will

other central banks should seek to
maintain a stable price level-a

be lower because some productive

stable value of each nation's cur-

result of a tax code thot allows depreciation only of the original cost

resources must be redirected to
thwarting thieves. Moreover, there

contribution that monetary policy

of capital equipment, not of its cur-

will be less growth over the long

can make to maximizing standards

rent, inflation-boosted replacement
cost. Moreover, taxing the inflated
value of assets with an unindexed

run because some investment expenditures will be diverted from,

of living over time. When people
have confidence that the price level

say, purchasing productive factory

will be stable (the inflation rate will

capital gains tax results in a confis-

machinery to building higher fences

average zero over time), they can

catory tax on real productive assets .
These disincentives are a further

to protect the factories .

drag on economic growth .

Similarly, inflation leads to socially
wasteful but personally necessary

rency-because that is the greatest

make plans for the future without
the need to use productive resources
to guard against changes in the
purchasing power of money.

actions to avoid loss (or to obtain
gain) from the resulting redistribution of wealth . Households hedge

The Only Tool

I nflation that is not accurately predicted redistributes wealth . If infla-

against inflation by buying houses,

tion is greater than expected, wealth
is shifted from lenders to borrowers

land, and nonproductive assets

S ound monetary policy is the
only way to achieve and maintain

as the purchasing power of the
funds used for repayment declines.

such as gold more than they other-

o stable price level. Because infla-

wise would . Firms increase their
inventories, analysts sell forecasts

tion is a monetary phenomenon,

to help people anticipate inflation,

and because the Fed is responsible
for controlling the growth of the

Not only is the redistribution of

and financial institutions develop

wealth arbitrary and unfair, but it
also lowers the standard of living

inflation-hedging products such as
adjustable-rate mortgages. Most

tion and erosion of the dollar's

and restrains growth . To illustrate

people who refinanced a home

purchasing power.

nation's money supply, only the
Fed has the ability to prevent infla-


Moreover, producing price stabil ity
is the most important task that can

Almost Is Not Enough

T he

be assigned to monetary policy.
Unfortunately, some people believe
that when the economy sl ides into
recession it has a natural tendency
to stay there, and so monetary and
fiscal policy actions are needed to
augment private demand in order
to get back to full employment.
Such notions about the possible
inadequacies of aggregate demand

recent U.S. inflation rate of
about 3 percent seems quite low to
many people, especially when compared with the high-inflation era of
the 1970s and early 1980s. Unfortunately, many economists as well
as the general public expect the
inflation rate to head higher. That
means the central bank' s commit-

emanating from businesses and
households are inconsistent with
our view that a market economy is

not en joy cred ibil ity. If businesses
and households base thei r everyday decisions on the expectation
that the value of money will fall ,
while the central bank acts to preserve the value of money, performance of the economy is impaired .
That possibility leads some observers to argue that moderate rates of
inflation should be tolerated because it is too hard to convince
people that inflation can and will
be eliminated .

inherently res ilient.
That is, if an unexpected economic
shock results in an increase in
unemployment, the economy will
noturally move back toward full
employment without any policy
stimulus to total spending . This will
happen because unemployed workers and owners of idle productive
resources have an obvious incentive to increase their skills and efficiency or lower their wages and
prices so that they can again earn

ment to achieve price stabil ity does

Few people would argue that it
would not be preferable to have
stable purchasing power for the
dollar, just as few would argue that
it would be desirable to change the
length of an inch or yard from one
year to the next. Nevertheless, many
contend that an eroding value of
the currency has gone on for so
long and has become so built in to
people's behavior that it is best just
to live with it.

The use of monetary pol icy to
mainta in the value of the dollar is
consistent with the goals that Congress has established for the Federal Reserve System. The underlying
purpose of the congressional mandates is to promote improvement in
the standard of living. Since economic growth leads to higher living
standards, and since price stabil ity

But even a low rate of inflation
would substantially shrink the pur-

promotes economic growth, a mon-

chasing power of the dollar over

etary policy that fosters price stability is fully consistent with congressional intent. Furthermore, actions
that preserve the value of the currency are the only way for monetary pol icy to ultimately satisfy the
congressional mandate to pursue
maximum employment and moderate long-term interest rates.

time . For example, it now takes
nearly $15 to purchase what $1
would have bought when the Federal Reserve System was organized
in 1914, even though annual inflation
since then has averaged only 3.4
percent. If inflation were to continue
at the 3 percent average annual
rate of the last four years, the price
level would double in less than 24
years. Moreover, with 3 percent inflation, at the end of the 21 st century

it would take $23 to buy what $1
buys today and $339 to buy what
$1 would purchase 80 years ago
when the Fed was created .
Because the rate of inflation IS
already low, stabilizing the purchasing power of money is within
our reach . Only the Federal Reserve System has the pol icy tools
needed to achieve price stability,
and achieving that goal is the
greatest contribution the Fed can
make to our nation's economic


1. "New Signs of G rowth Fan Infla tion
Fears," The New York Times, September 30,
1994 .
2. David Wessel, "Fed Decides a ga inst a
Rise in Rates Now," The Wall Street Journal,
September 28 , 1994.
3. Milton Friedma n, "The Ro le of Moneta ry
Policy" (presidentia l add ress delivered a t the
80th a nn ual meeting of the American
Economic Associa tion, Washington, D.C.,
December 29, 1967), American Economic
Review, vol. 58 , no. 1 (March 1968), p. 17.
4 . Employment Act of 194 6, Section 2, as recorded in United States Code: Congressional
Service, Lows of 79th Congress, Second
Session, St. Paul : West Publishing Company,
5. Full Employment a nd Ba lanced Growth
Ad of 1978 , a s recorded in United States
Code: Congressional Service and Administrative News, Lows of 95th Congress, Second
Session, vol. 1, 92 STAT., p. 1890 , St. Paul:
West Publishing Company.
6. This a mend me nt to the Federal Reserve
Ad is included in the Federal Reserve Reform
Act of 1977, as recorded in United States
Code: Congressional Service and Administrative News, Lows of 95th Congress, Rrst
Session, vol. 1,91 STAT., p. 1387, St. Paul :
West Publishing Company.
7. Roger Blo ugh, quoted by Malcolm S.
Forbes in "Fact a nd Comment," Forbes, vol.
100 , no. 3 (Aug ust 1, 196 7), p. 18 .
8 . Milton Friedman, "Inflation : Ca uses a nd
Consequences," in Dollars and Deficits,
Englewood Cliffs, N.J.: Prentice-Hall, 1968,



or December 31 ,




R. Chris Moore
Vice President
Supervision and Regulation



Rayford P. Kallch
Assistant Vice President
Supervision and Regulation,
Credit Risk Management

Jerry l . Jordan
President & Chief Executive Officer

Robert W. Price
Vice President
Check Collection, ACH, Funds Transfer,
Electronic Delivery Services

Kevin P. Kell ey
Assistant Vice President
Budget, Expense, Financial Planning

Sandra Planalto
First Vice President &
Chief Operating Officer

Edward E. Richard son
Vice President

John E. Kleinhenz
Assistant Vice President

Charles A. Cerino
Senior Vice President
Cincinnati and Columbus Offices

Susan G. Schueller
Vice President & General Auditor

William J. Malor
Assistant Vice President
Check Collection

Jill G. Clark
Senior Vice President &
General Counsel
Corporote Communications &
Community Affairs
Samuel D. Smith
Senior Vice President
Focilities, Financial Services, Protection
Mark S. Snlderman
Senior Vice President &
Director of Research
Harold J. Swart
Senior Vice President
Pillsburgh Office
Donald G. Vlncel
Senior Vice President
Automation, Cosh, Securities/Fiscal,
Custody Control, EEO Officer
Robert F. Ware
Senior Vice President
Check Collection, ACH, Funds Transfer,
Marketing, Electronic Delivery
John J. Wixted, Jr.
Senior Vice President
Supervision and Regulation, Credit
Risk Management, Data Services,
Information Security

Andrew J. Baza r
Vice President
Jake D. Breland
Vice President
Cosh, Securities/Fiscal, Custody Control
Andrew C. Burkle, Jr.
Vice President
Supervision and Regulation,
Community Affairs Officer
lawrence Cuy
Vice President
Supervision and Regulation
Elena M. McCall
Vice President
Human Resources

Joseph C. Thorp
Vice President
Robert Van Valkenburg
Vice President
Accounting, Budget, Expense,
Financial Planning
Andrew W. Watts
Vice President & Regulatory Counsel
Charles F. Williams
Vice President
Automation , Check Collection,
Cincinnati and Columbus Offices

laura K. McGowan
Assistant Vice President &
Corporate Secretory
Corporate Communications &
Community Affairs
James W. Rakowsky
Assistant Vice President
Data Processi ng
Kimbe r ly l. Ray
Assistant Vice President
Check Collection, Marketing
Pillsburgh Office
David E. Rich
Assistant Vice President
Data Communications, Systems

David E. Altlg
Assistant Vice President & Economist
Monetary Policy & Macroeconomics

John P. Robins
Examining Officer
Supervision and Regulation

Terry N. Bennett
Assistant Vice President

Terrence J. Roth
Assistant Vice President

Raymond l. Brinkman
Assistant Vice President
Automation, Building, Cosh, Protection
Pillsburgh Office

Robert B. Schaub
Assistant Vice President
Accounting, General Services, Fiscal,
Pittsburgh Office

WIlliam D. Fosnlght
Assistant Vice President &
Assistant General Counsel
Elaine G. G e ller
Assistant Vice President
Data Services, Information Security
Robert J. Gorius
Assistant Vice President
General Services, Moil
Eddie l. Hardy
Examining Officer
Supervision and Regulation
Barbara H. Hertz
Assistant Vice President
Building, Cosh/Fiscal, Protection,
Registered Moil
Cincinnati Office
David P. Jager
Assistant Vice President
ACH , Funds Transfer,
Electronic Delivery Services

William J. Smith
Assistant Vice President
Human Resources
Edward J. Stevens
Assistant Vice President & Economist
Monetary Policy and Payments System
James B. Thomson
Assistant Vice President & Economist
Bonking and Financial Markets
Henry P. Trollo
Assistant Vice President
Data Systems Support, Deputy EEO
Darell R. Wlttrup
Assistant Vice President




As of December 31 . 1994



Chairman & Federal Reserve Agent
A. William Reynolds
Chairman of the Boord
Fairlawn , Ohio

Deputy Chairman
G. Watts Humphrey, Jr.
GWH Holdings, Inc.
Pittsburgh , Pennsylvonia

Edward B. Brandon
Chairman & Chief Executive Officer
Notionol City Corporation
Cleveland , Ohio

William T. McConnell
Chairman & Chief Executive Officer
The Park National Bonk
Newark, Oh io

Robert Y. Farrington
Executive Secretary-Treasurer
Ohia Stote Building & Construct ion
Trades Council
Columbus, Ohio

Thomas M. Nles
Cincom Systems , Inc.
Cinci nnoti, Oh io

I. N. Rendall Harper, Jr.
President & Chief Executive Officer
American Microgrophics Co. , Inc .
Monroeville, Pennsylvania

Douglas E. Olesen
President & Chief Executive Officer
Battelle Memoriol Institute
Columbus , Ohio

Alfred C. Le ist
Choirmon , President &
Chief Executive Officer
The Apple Creek Bank ing Co.
Apple Creek , Ohio








John N . Taylor, Jr.
Chairman & Chief Executive Officer
Kurz·Kasch, Inc.
Dayton, Ohio

Robert P. Bozzone
Vice Chairman of the Boord
Allegheny Ludlum Corporation
Pitlsburgh, Pennsylvania

Raymond A . Bradbury
Retired Chairman
Martin County Cool Corporation
Inez, Kentucky

Helen J. Clark
Chairman, President &
Chief Executive Officer
Apollo Trust Company
Apollo , Pennsylvania

Jerry W. Carey
President & Chief Execu tive Officer
Union Notional Bonk and Trust Co .
Barbourville, Kentucky

David S. Dahlmann
President & Chief Executive Officer
Southwest Notional Corporation
Greensburg, Pennsylvania

Phillip R. Cox
Cox Financial Corp .
Ci ncinnati , Ohio

Sandra L. Phillips
Executive Director
Pitlsburgh Partnership for
Neighborhood Development
Pittsburgh, Pennsylvania

Eleanor Hicks
M.I.N.D.S. International
Cincinnati, Ohio

Jack B. Piatt
Chairman of the Boord
Millcrafl Industries, Inc.
Washington, Pennsylvania

Wayne Shumate
Chairman & Chief Executive Officer
Kentucky Textiles , Inc.
Paris, Kentucky

Randall L. C. Russell
President & Chief Executive Officer
Ranbar Technology, Inc.
Glenshaw, Pennsylvania

Marvin J. Stammen
President & Chief Executive Officer
Second Notional Bonk
Greenville, Oh io

Wesley W. von Schack
Chairman, President &
Chief Executive Officer
Pittsburgh, Pennsylvania





For years ended December 31



Interest on loans
Interest on government securities
Earnings on foreign currency
Income from services
All other income
Total current income


$ 1,331,435,006



$ 1,235,295,386








- 12,380,692

$ 1,222,671,184


Current operating expenses
Cost of earnings credits



$ 1,132,681,854


Additions to current net income
Profit on foreign exchange transactions
Profit on sales of government securities
All other additions
Total additions


Deductions from current net income
Loss on sales of government securities


All other deductions
Total deductions


Net additions or deductions
Cost of unreimbursable Treasury services


Assessments by Board of Governors
Federal Reserve currency costs
Total assessments by Board of Governors

$ 1,359,788,755

$ 1/087,208,158


Dividends paid





Payments to U.S. Treasury
(interest on Federal Reserve notes)
Transferred to surplus
Total distributed

$ 1,359,788,755

$ 1,087,208,158




1993 - 94

Edward M. George
President & CEO
Wesbonco, Inc.
Wheeling, West Virginia
Jack A. Hartings
President & CEO
The Peoples Bonking Company
Coldwater, Ohio



E_S_S__A, D_V_I_S_O


E. Eugene Lehman
President & CEO
The Union Bonk Company
Columbus Grove, Ohio

William H. Braun
Custom Rubber Corporation
Cleveland, Ohio

Norma J . Linville
President & CEO
Formers & Traders Bonk of Mt. Olivet
Mt. Olivet, Kentucky

Ronald B. Cohen
Senior Portner
Cohen & Company
Cleveland, Ohio

Richard C. Mizer
President & CEO
Century Bonk
Upper Arlington, Ohio

Terri L. Hardt
Automatic Controls Service, Inc.
Glenshaw, Pennsylvania

Robert F. Muth
President & CEO
The Andover Bonk
Andover, Ohio

Glenn R. Jennings
President & CEO
Delta Natural Gas Company, Inc.
Winchester, Kentucky

Robert A. Rimbey
President & CEO
Reeves Bonk
Beaver Falls, Pennsylvania

Norman Klass
President & Owner
Agri Supply Company, Inc .
Leipsic, Ohio

Donald S. Shamey
President & COO
The Citizens Bonking Company
Evans City, Pennsylvania

Cheryl L. Krueger
President & CEO
Cheryl & Compa ny
Columbus, Ohio

David Voight
President & CEO
The Citizens Bonking Company
Sandusky, Ohio

Gerald M. Miller
Chairman & Managing Portner
Miller-Volentine Group
Dayton, Ohio

Benedict Welssenrieder
President & CEO
Hocking Volley Bonk of Athens
Athens, Ohio

Jeanette C. Prear
President & CEO
Doy-Med Health Maintenance Plan, Inc.
Dayton, Ohio
Scott L. Rusch
Vice President & Treasurer
Anomotic Corporation
Newark , Ohio
Peter N_ Stephans
Dynomet, Inc.
Washington, Pennsylvania