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FEDERAL RESERVE BANK OF CLEVELAND ANNUAL REPORT 1994 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. 2 President's Foreword 5 Federal Reserve Policy Promotes Growth 11 Officers 12 Directors 14 Comparative Financial Statement 16 Small Bank Advisory Council and Business Advisory Council FOREWORD A mid significant political and economic developments that made II 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 financial institutions through improved 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. II 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. a 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. nL~ Jerry L. Jordan President 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 OUT N umerous media reports last year F-~I{~ fU'.TES OF FE"'It,·, ~ ,., TIlt..T ~ ~ROl' IN JO~LESSNcS~ ~OVLl) lRIGGER INFLATION. ~===::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~ 'NoF-K \N"~ ~~E '{OU T~I(ING To 00- RIJIN tTFoj2. TI\E fEST OF US?.' 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 COPYRIGHT 1994 . BEN WASSERMAN, BOSTON GLOBE DISTRIBUTED BY LOS ANGELES TIMES SYNDICATE. REPRINTED WITH PERMISSION 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, II 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- IY ACT OF CONGRESS 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. II 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 ...an 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 goals. 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. ROGER SCHILLERSTROM , CRAIN COMMUNICATIONS INC. REPRINTED WITH PERMISSION. 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 II 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 II 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 NO TRADE· OFF 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. real 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 The belief that rapid exploit the supposed 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 ployment, that 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. they reason 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, l 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 ROB ROGERS. REPRINTED BY PERMISSION OF UFS. INC. 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- a 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 Income. 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 well-being. Endnotes 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, p.20. 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, p.39. FEDERAL As or December 31 , 1994 RESERVE BANK R. Chris Moore Vice President Supervision and Regulation OF CLEVELAND 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 Marketing John E. Kleinhenz Assistant Vice President Marketing 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 Services John J. Wixted, Jr. Senior Vice President Supervision and Regulation, Credit Risk Management, Data Services, Information Security Andrew J. Baza r Vice President Automation 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 Building 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, Marketing 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 Programming David E. Altlg Assistant Vice President & Economist Monetary Policy & Macroeconomics John P. Robins Examining Officer Supervision and Regulation Terry N. Bennett Assistant Vice President Cosh Terrence J. Roth Assistant Vice President Marketing Raymond l. Brinkman Assistant Vice President Automation, Building, Cosh, Protection Pillsburgh Office Robert B. Schaub Assistant Vice President Accounting, General Services, Fiscal, Securities 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 Officer Darell R. Wlttrup Assistant Vice President Accounting m FEDERAL RESERVE As of December 31 . 1994 II CLEVELAND Chairman & Federal Reserve Agent A. William Reynolds Chairman of the Boord GenCorp Fairlawn , Ohio Deputy Chairman G. Watts Humphrey, Jr. President 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 President 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 BANK OF CLEVELAND CINCINNATI PITTSBURGH Chairman Chairman 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 President Cox Financial Corp . Ci ncinnati , Ohio Sandra L. Phillips Executive Director Pitlsburgh Partnership for Neighborhood Development Pittsburgh, Pennsylvania Eleanor Hicks President 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 DQE Pittsburgh, Pennsylvania II COMPARATIVE FINANCIAL STATEMENT STATEMENT OF CONDITION INCOME AND EXPENSES For years ended December 31 1994 CURRENT INCOME Interest on loans Interest on government securities Earnings on foreign currency Income from services All other income Total current income CURRENT $ 137,807 1,227,039,616 58,356,750 45,499,574 401,259 $ 1,331,435,006 $ $ 83,758,408 12,381,212 $ 1,235,295,386 $ $ 159,216,132 -033,927 159,250,059 $ 15/319,310 2,556,007 2,776,384 20,651,701 1,510,117 5,063 1,515,180 157,734,879 1,964,554 $ -033,032,393 33,032,393 - 12,380,692 1,685,403 181 1,105,592,400 72,384,137 44,464,874 229,592 $ 1,222,671,184 EXPENSES Current operating expenses Cost of earnings credits CURRENT NET INCOME PROFIT 1993 AND 79,232,490 10,756,840 $ 1,132,681,854 LOS S 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 Expenditures Federal Reserve currency costs Total assessments by Board of Governors NET INCOME AVAILABLE FOR DISTRIBUTION 9,693,400 21,583,556 31,276,956 $ 1,359,788,755 8,215,500 23,192,101 31,407,601 $ 1/087,208,158 DISTRIBUTION OF NET INCOME Dividends paid $ 14,283,474 $ 12,010,618 Payments to U.S. Treasury (interest on Federal Reserve notes) Transferred to surplus Total distributed 1,311,506,031 33,999,250 $ 1,359,788,755 1,027,887,290 47,310,250 $ 1,087,208,158 m SMALL BANK ADVISORY COUNCIL, 1993 - 94 Edward M. George President & CEO Wesbonco, Inc. Wheeling, West Virginia Jack A. Hartings President & CEO The Peoples Bonking Company Coldwater, Ohio L O~U_N~C~I~L~,~1~9~9~4~______~1- __B __ U_S_I_N__ E_S_S__A, D_V_I_S_O __R_Y__C __ I E. Eugene Lehman President & CEO The Union Bonk Company Columbus Grove, Ohio William H. Braun President 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 Owner 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 President Dynomet, Inc. Washington, Pennsylvania