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This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
(itnlenls
I*tters f ron St'nior illutrLgcnu:nt,
'l'y,6
2
fypa.t o/ Paper:
I'he Atse_for h'ederul Resenrc Indelnntlan.t.t'. (t
Ncw Building, I9
lloartl tf Dirtttors,
20
Aduisorl ()tunr:iLs.2 I
I 99() I' in oncial Sk rt em.ents. 2 2
OlJicers,
25
he Federal Reservetsank ofDallas is one of 12 resional l'ederal ReserveBanks in the United States.
Together rvith the Board o{ Governors in Washington, D.C., these organizationsibrm the Federal Reserve System and function
as thc naii<tn'sc:entralbank. The System'sbasic purposeis to provide allow of rnoneyantl credit that u'ill ibsterorderlyeconomic
grorvthantl a stable dollar. In addition, l'ederal ReserveBanks supervisebanks and bank holding companiesand provide
crertait'tllnancial services to the banking industr--v,the {'ederalgovernment and the public.
Since 1914. the FederalResen'eRank o1Dallas has servedthe financial institutionsin the Eleventh District. The Eleventh
District encornpassesapproxirnately 360,000 square miles and cornprises the st;rle of Texas. northern Louisiana and southern
Nerv Mexictr.'j'he three lrranr:h oiTiceso{ the Feileral Reserve llank of Dallas are in El Paso. Houston and San Antonio.
LE
BOBBY
TTER
ROM
INMAN
AND
OB
BO
KIN
s we prepare to relinquish the
leadership of the Federal Reserve Bank of Dallas, we would like to pause
a moment ancl reller:t on the turbulent decade of the l9B0s in this District
and pay tribute to our dedir,ateclenrplovees.who served this Bank and the
region so well. The details of rvhat came to be known as the "Texas
Banking Crisis" are well-knotn, and the key roles played by our examiners and other professionals in the bank super-visionfunction are readily
apparent. Less appreciated, probably, is the role that the employees in all
offices of the Bank playecl in containing the crisis and preventing it from
l g s c hi n g s r s t e m i r 'l r r o p o rilr n : .
One can easilv imagine the explosion in the workload of the
rnembers of our staff n'orking directly or inclirectly in the administration of
the discount rvindrxv. Nerv and different problems required unique and
innovative solutionsas the crisis reached proportionsnot seen since the
19ll0s. Yet, the absenceof svstemicrepercussionsis a testamentto the
talents and skills of those involved. prol'essionalsand non-professionals
alike. as nell as to institutional safeguarclsresulting from the earlier crisis.
'fhe
Dallas Fecl trulv fac,edand passed the challenge of acting as "lender
oi last resort."
What rnav not be imagined so easilv, however, is the degree to
whic:h enormous burdens rvere also piaced on the backroom operations of
the Dailas Fed-the
extent to which rve were also called upon to act as
"processor of last resort." Corresponclent-respondentrelationships began
to break clonn as each sought protectionfrom perc,eivedrisks, and existing
clearing arrangemenls rvere threatened. Our offices lvere called upon not
onlv to handle increasingvolumes ol transactionsbut to do so in an
environmenl tif rapitll.-v
changing relationshipsin a climate of risk and
uncertaintv. These operational crhallenges,lasting several years, affected
virtuallv even. department ancl unit of this Bank. We are tnrlv grateful to
all our ernploveesfor the exemplary rnanner in u-hich the,vmet the
crhallenges.and rve are proud of theil service to our region ancl our
('ountlr,r.
Our departure ('onresrluring a per.iorlof tr.rrnsition,not onlv {irr this
Banl<lrul also lil the nation and its finan<rialsystcm.'l'hecountry has
e n t e r - e lchl a t t c h o p e l i l l b e a m i l d a n d s h a l l o u ' r c t , e s s i o nl r,h i c h ,
nevellhelcss.has the poterrtialto threatenthe incipient ret,ovelvin this
region. The "'Ii:xas llanking (lrisis" no lorrgel looks so local or so uniclue
as ollrel legions erpelienc'c the patterns that becarnefanrilitrr[o us se\.el.a
years ago. \\'e hopc the knorvledgeantl erpcrience gainet:lbv this Bank
<ranberrellt olhers :rn<lhelp mitigate the inrpact ol'rvhnthas now bccromea
natiorralproblenr.
As uur ollrr -*erviccrlrarvsto a r.Lrse.rve nish [Jugh Rolrinsorrantl
B o l r \ ' I c T e c ra l l t h e l r e s ta s t h e v t a k e o n t h e n e w r , h a l l e n g e os 1t h e l 9 c ) 0 s .
\Ve erpt'r't that the tlerlir::rtetltlirecrtorsanrl etnploveesol the l'ederal
Ilese'r'e Ilank,f Dallas n'ill se.ve as neil tlu'ing thei' tenure as they rlit'l
tluling orrls.
On l)et ernber31 " 1990" Adnt. Bdlt.y Il. Innttn, [/.S. ,Vzry (retirerl),
contpteterlelnt.ost,\etln,)c(I/'sor o rlirer'toroJ'thel'ederctl Resenr:Ilank ('
DaLltt.s.tlta lrr,st
Jitur rettrsas choimtun of'tlrc bourd,.On Junuury',31,I99l,
Rolrcrt ll. Bo.tkirt retiretl.from tln- llu,nA'rtfier nutre thon 37 lcors o.fsenice. the
lrrst l0 )t'tu's rt.sprcsidenlrrrul t:hie.f'eteuttireo.llil,er.
(,\s\
LETTER
HUGH
ROM
ROBINSON
BOB
AND
Mc
EER
e \\'oul(llikt' to take this opportunity to
t l r a n k B o l r [ J o v k i na n t l I ] o l r l r r I n r r r a rfri r l t h t ' i l t n u t r l ' r ' e a t 'tst f l e a d e r s h i po f
t h e [ ' t ' t l e r a lI l e s e n e I ] a n k o l l ) a l l a st l t r l i r t gl h a t r r a s p l o l r a l r l vi t s { i n e s t
horrls. \\ e \rere. inrleerl.Iirltunate to har,eat the helrrrthest:tlvo learlersat
n tinre ulren cool lteatlsanrl steatlt,hatrtlsu'erestt crut:ial. We lvoulrl etlso
oi the performanceof all
like to join tlrt'nrin tht'il praise anrl trppre<'iation
o u l e u t p l o r c c si n a i l o u t ' o f J i t ' e tsh r l i n g t h t ' t u r l i u l e n t 1 9 8 0 s .
As l'e look to the lutult'. w.eiintl that not all the trhallengesare
llehinrl us.
'fhe
national e('or1()nl\is in a ret'essionof unknorln tlepth and
'fhe
rlrrlation.
thlift <'r'isislingels. irnrl tlre lranking intlustrv remains
Iragile. I un<lanrt'ntaliinant'ial le{irlnr is intpet'ative"especiallvin the area
o l r l e p o s i ti n s u r a n t ' eb u t i n o t l r e l u r ' ( ] a as s n e l l . i n c l u d i n gt h e r e g u l a t o r v
stru('ture.\\'e har.eno spet'i{it lefirlnr ploglanr to put {irnlartl at this time,
b u t u e b e l i e r e s t l o n g l r ,l h a t t h t ' F e c l e l a lR e s e t ' r ' seh o u l t It ' o n t i n u et o p l a y a
nrajol lole in lrank supen'ision. not otrlv as a ne(ressarvatljunr:tto its
t'onrluctof nronetarl polit'r' lrut ulsu lrct'uuseof its toles as Lrothlender and
letter {rom
pl(x'cssorol last lesolt" as rlest'r'ilrcrlin tlte ac't'onrpanving
.%z%*=
. ' \ r l n r i l aIl n n r a na n t l I J o l rI l o v k i r r .
TIre finaut ial histon oI lhis legiorr in the 1980s rt:tnindsus agairt
o [ ' t l r t 'i u r l r o l t r n c t ' o Ia c e r r t l u l] r a n kn i t h a s t r ' o n gr e g i o n a lp r e s e n c ea n d
olrelationalrrrle. I)isluptiortsin the l)tvllrelrtssysterll.as rvell as (:orltra(:tions irr tlre rrteartso[ partttt'nt"r'an tlrt'eatertthe Iirtant:ialstrttt:trtrethat
s u l ) l ) o l ' tos r r l t ' r ' o r t o r n in<e' l l - l r e i n g .O t r l l e g i o n a lo l t e l a t i o n s\ r e r e a l l
i u r p o l t u n t ' l t ' n r e r ritn p l e l e r r t i n gt l r t ' l r a n k i n gs i t u a t i o nf l o t ' nt ' a u s i n gt h e s e
l v p t ' so l r l i s l u l r t i o n s\.\ e t o o I r o l r et h a t u h a t t h i s B a n k h e r sl e a r t r e ttl , a r t
l r e n e ift o t h e l s l h a t r r r a ve r p t ' r i t r t c t ' s i r n i l a r ' [ ) r e s s L r irne st h e n x r n t h sa n c l
\t'ius
to ('olll('.
W i l h t h e a l u r r ei n r r r i r r t lo. n t ' o [ t l r r ' B a n k ' so l r j e c t i v e si n t h e c o n r i n g
\ e a r ' - i*s t o r ' o r r l i n r r oe u l r e r t ' u r c l ri n t o t l r t ' t t a t t t t ea t r t lt ' a u s e so f o u r
f l n a n t ' i a lt ' r ' i s i sa n r l p o s s i l r h L ' s s o n -a* n r l i r r r p l i c a t i o n lsr t r o t h e r sa n t l f o r
l n artopporttt{ u t r r l er e f i r l r r r,.\ n o l l r e lg o a l n t ' h a r e f i r t t l r e I ] a n k i s l r a s e t o
t l'
n i t r l i r l t h r ' l i r t t r r t ' r ' a t l r el hr a n a r e v i e n ' o f t l r e p a s t - t h a t i s , t h e p r o s p e t ' o
i tth \ l t r i c o . I J t v i t ' t n eo f o u l g e o g r a p h v
a h i s t o l i t 'l l e e t r a r l ea r ' r ' i l n g e r n el n
as \\iell as our intercsls,'r,r,e
hope that this Bank can be a leader in exploring Nolth-South trade issues ancl rnake a c:ontlibution torvard Ii'eer trade
with oul ncighbors to the South.
Our experience in the l980s rvas a reminder not only of the
importanr:e of a strong regional plesencreancl operational role for our
"dec:entralizetl r:entlal bank" but also of the importance of private-sector
participation antl the absenceoi political pressures.Central bank independenceis crucial to the long-run health oi any economy.That independenr:e can be threatened both l:rythose who <:onsciouslywish to thwart it
and b.v institutional arrangements and circumstances as well. Just as a
benevolentdeposit insurance systemcould help undermine market
discipline arnong banks and thrifts-almost
unnoticed over a period of
years-so too can a monelary systern burdened by growing budget deficits
and governmentdebt undermine the independenceof the central bank in
its cronrluctof monetary policv. The acr:ompanyingessavin this report
adclressesthis conc:ern.
As rve nrove into the 1990s, ive look for-n'ardto serving the institutions antl the people oi the llleventh Federal Reservellistrict.
On Jonutry l, 1991, Maj. Gen. Hugh G. Robin,son,,
U.S. Arm1.
(retiredl, ussttnter!the t.'hoirntanshipo-t''theboarrLof tlirectors oJ the |-edelal
Resen:e&tnk of'Dal,los, r4fterseruing as o dirt:ctorJbr six yeors. RobertD.
McT'eer,Jr., beutne presklettt and chieJ exertLtit,eoJJicerof the DaLlas Fed,
ffictiue Februrrt' 1, I 991.
K//48 /ilf"'*/,
TWO
TY
PES
P APE
o['
R:
.THE
I 970, our nation's federal budget
CASE
tleficit avelagerl less than Sl b i l l i o n a n n u a l l y , o n l y o n c e e x c e e t l i n g$ 1 t )
billion. Dellcits of the I970s seernetlto rlwarl those of the previous era.
a v e r a g i n gn e a r l vS 3 0 b i l l i o n . w i t h a h i g h o f $ 5 9 b i i l i o n i n 1 9 7 5 .M o r e r e c e n t
tlelir'its. Ixrlever'. clrvarleven those of the 1970s. Federal budget clelicitstt{'
tht' l9tlOs avertrgednrore than $142 billion. and estimates nor point to
tlelicits of mole tharr$300 lrillion in the neur-tenn fiscal vears of the 1990s.
lVhen gor,ernmentrulls a budget dellcit. there are two types ol paper
that can finance that rlellcit. One tvpe is interest-bearingpaper, knolvn as
The other is non-intereslgor;enrrnentrlelrtarrrlissut'tlhv the U.S.'l'r'easurv.
and issuetlby the central bank,l
healing paper, knol'n alsmonev or'('Lll'ren('v
( , i l e a t in g
Iinan<'erlellcits fi'orna gor enrnrentIiscal stanrlpointbec'ausecurrency tloes
rrot lreul irrtelest. Culrt'nc'r' t'r'eution.holever, ('auses hflutiort, tvhic:h
tlansIels lesoLu'('esinvoluntalilt {r'onr tltt' pl'ivat{] se('tor'[o thc letleral
go\ efnnlellt.
This essavalgnes that centlal bank indepenrlenceis mote irnprortant
totlav than at aur,tinrein histon'. Becatrsefiscal int'entivesforinflation gro*
as govelnnlentrlebt grorvsantl irr lieiu ofthe huge lun-up in governnrentdebt
in the 1980s, with prospects for continued growth in the 1990s, we believe
that the principal mission of our nation's central bank is at risk.
Created to operate independently within government, the Federal
Reserve has as its principal mission the provision of a stable medium of
exchange for the na1i6n-3
stable money.2 This is accomplished by the
f"rt/.*"*y
establishment of currency and by the control of money's value, which, in
ft"/rrn
turn, is accomplished by controlling money's supply.
The central bank's job of limiting the expansion of money, however,
becomes much more difficult in an environment where the volume of paper
of the other type-debt-is
large and expanding. As government debt
b u i l d s . t h e f i s c a l b e n e f l t sf r o m i n f l a t i o n b u i l d . c r e a t i n ge v e r - g r e a t epr r e s -
surefor the monetaryauthorityto inflate.
Our aim in this essayis to providea convincingcasefor the view that
thepowerto spendmoney and thepowerto print moneymustbe separateand
independent powers within government. We believe that the separation of
the money-spending and money-pnntrng powers within government is
essential to the efficient production and allocation of resources in society.
The principal point is that in order to continue to control inflation in the
United States, the independence ofthe Federal Reserryemust be preserved.
"*/
^ A
lrU.t"*ty
ruutle
"*/
o"/tutek
,rl-/.rrilt
/aue,r,l
unh,m /
lJ
INFLATION ISA MONETARY PHENOMENON
Our case begins with the premise that in{lation is a monetary phenomenon. Economists disagreeon many propositi,rns.But the one propositionon
which economistsperhapsmostwidely agreeis that ext'essivemoneycreation
i r I h e r , ' o tr i - t u s ret l ' i n l ] a l i o n .
In{lation is rising prices,but a price is simply the number of piecesof
paper-Fecleral Reserve notes, or money-that
it takes to buy a good. The
gl'eaterthe volume of rnoney relative to goods in the economy, the greater rs
the price ofgoods. lnflation results,therefore,when the volume ofmoney in
grows too i'ast lelative to the volume of goods and services.
the ecronor.r.ry
Dvitlence {rom 79 countries over the post-World War II period shows
thal rvhenrnoney grorvthis high, inflation is also high (Chart l).'\The data thus
attest to the prenrisethat excessivemoney growth causesinflation.
fay',rad/e
rft/h
cL
t?.eil4/t%
E A S YM O N E Y D O E S N O T A I D E C O N O M I C G R O W T H
Although excessivemortel r'Leationcausesinflation, one argument
often given in favol of expansionary monetary polisv-or
"/"*/r-f
o'easymoney"-i"
that eas.v money aids economic growth. llconomists have not reached a
consensuson this issue, but few would claim that money growth can provide
anv lasting or long-run boost to ecronotnicgrowth.
Dconornic gron-th is rising real income. or real earnings; but money
print etl is nor moneyeurned. That is to say,the mere at t ol printing monel does
not, in and ol itself, changethe amount ol goodsand servicesavailablein the
economy,nor does it have any lasting influence on an economy'spotential to
protluc:eadditional go<itlsand sert'ices.Lasting real income growth can occur
only rvhen f i1i2s13-11sing their minds, hantls, tools, and technology-u'ork
togetherto produce a greater volume of goodsand services.While the creation
of a national currency and a monetary and bankin g , stem can facilitate this
process,the excressive
to unstable prices-that
creationof money leads <,,nly
is, to inflation.
Dvir[encrefrorn 79 countries over the post-World War II period shows
a couniry's rate of real economic
no generallypositive relationshipbet'w'een
grorvth and its rate of nronev creation (Chart 2). Real income growth tends to
center in tl'rerange of 3 to 5 peroent acloss countries, and countries with
higher rates ol real inc-omegrowth clonot generallv tend to be those rvith higher
lates of mone\. expansion. A more c:arefullook, in fact, would show that as
inilation lises, it can actually lead to a reduction in output and employment.
I N F L A T I O N D I S R U P T ST H E P R O D U C T I O N
Chart2
S SOCIETY
A N D A L L O C A T I O N O F R E S O U R C EI N
Average income growth and
currency glowth in 79 countries
I n c o m eG r o w t h( P e r c e n t )
Economists have extensively studied ho'lv inflation can all'ect eco-
10
nomic well-being anrl have rea<:hetlconsiderable agreement.+Because
t
t'
aat
._,
here.
Among its most rviclely cited ef'fbcts, inflation has the tendency to
arbitlalily ivipe out the r,alne of incorne saved in the form of money, anil it
a
a
inllation's ellects are well-documented,we will not attempt to prove them
ao
.
!a
lot
3r
a
shili,* real lvealth fi'om cleclitors lo debtors.'llhere are other consequencesas
25
welf. Inflaticrnt'an leaclkt areductiori in emplovment an(l output. Inflation
transfelsresourcesto the public sector,allowing the govenrmentto be larger
than it othenriservouldbe rvhilereducing the purchasingpowerofthe private
set'tor'. Inflation can leacl kr an ineflit'ient utilization of an economy's
prodrrctiveresourcesanrl to an inr:orrectmix ofproductionin society.ln short.
inl'lation rlisrupts the protlur:tion and efficient alloc'ationof lesources in
socl('t)-.
WHAT, THEN, IS BEHIND MONEY GROWTH?
Broad-lrasetlevidencesupportsthe viervthat while moneygrowthantl
real er,onomica<:tivitvare generallv unrelated, rnoney growth causesinfliition. \['hy. then" don't mole central barnksacnrssthe world simplv set money
grouth at rates that leerclto no inflation? Such a polit:y'rvould provide prir:e
stalrilitv.sirnilarto that experient:erlin Japanand Cermany.'lhe answer,most
assuledly.lies il governrnentlrudget rlelicits and the way they are financed.
C h a r t1
Average inflation and
currency growth in 79 countries
n f l a t i o n( P e r c e n t )
C u r r e n c yG r o w t h( P e r c e n t )
H O W G O V E R N M E N T SF I N A N C E B U D G E T D E F I C I T S
Guvenrnrente.rpendituresr:anhe divideclinto trvolrroad c::rtegories:
(suchas socialspending.nrilitarvspentling,education
go\,elnnrentpr.rlchases
outlavs) antI interest on outstanding govelnment debt. The government
financ,es these expenditures in lrasir:ally t$.o 'l\'ays: by taxation and by
borlowing (Clrctrt,7).
Bv definition. government runs a budget delicit when expenditures
erceed tax receipts.The governmentfunds the deficit by salesofdebt to the
private sector. But here's rvhere money creation enters the picture. The
central bank c:ander:icleto ailow all of the increase in the public debt to remain
/"/"tA
re/u.tr.e
outstanrling.or it t'an "monetize" a porlion ofthe deficit by, in elfect,printing
government delrt.
culrency and purcl'rasing..
fl"
""*t*;r*
To illustrate the inplications of this choice, consider the example of
"/
a $1.50billion U.S. budget deficit (Chart 4). Becausegovernmentexpendi-
fuetvtttlczttl/n/pr-
tures ercer:d tax rec:eipts,the'li'easury sells,$150 billion of newly created
go\,elnment sec'urities to the private sectof, and government debt thereby
/nlt"*
incrreases
initiallv brr this arrlount.The FecleralReservechoosesto respond
lrv pulcrhasingon the open ntarket,sav,$il0 billion o{ governmentsecurities,
using firr this pun'hase S30 billion of nelr,lvcrealed Federal Resewe notes
(that is, t'ulrt'nc1').Orrnet, then.'l'r'easulvpapel in the economylises b,vSl20
lrillion, and Feclelalllesi't'r'cpaper rises bv $ll0 billion.
'fwo
types ol paper
ale <,r-eatetl
as a lesult o1'thedellcit.
GOVERNMENT BUDGETDEFICITS
A R E F I N A N C E D B Y C R E A T T N GD E B T A N D M O N E Y
Govelnnrentbudgetclelicitslecluile the cleatit.rnof governnrentpaper.
'l'he
t'entrtrlbank r:annotdetelrninethe total volume of governrnentpaper-
nrorrev7r1rr.r
tlebt-in
lhe economv becausethe t:entlal bank cloesn'tdeter-
rnint'tlrt'sizeof the dellcit. Hol ever',the t'entlal bank can and ultimatel-vdoes
rlelelnrine tlrc t'rtent to rvhi<'hgo\,elnnrenlpaper in the econourvis deht or
'l'his
l)lone\:.
is rlorrt' ln t'er.tllttllrank ercrhangesof gor,emnrenlrlebt for
lllone\'-('ollunonl y lelelletl [o irs ollt'tt rttalkertopelul.ions.
l V l r a t t l e t e l n r i n e sa c e n t l a l b a n k ' s c l r o i t ' t ' o l h o u , m u c h r n o n e ) ' t o
c reatr'?(larr'tt lrecentlal bank sinrplr:r'ontlut'tnroru'tarr,
Polit'yindependently
o [ l i s c a lt l e l ' i t ' iot l t l t ' l r tt o n s i t l e l a t i o r r s l ' l ' h ai st . r ' a n ' tm o n e vg r o r v t hs i r n p l vb t
lestlit'tt'rl to tlic lale t'allerl fir to t'onlrol inllation. regaldless of the tax,
s p o r r l i n g .a r r r lr l e l r tp o l i t ' i e so f g o r e L t i t t t c n t ? ' faon s r v e r t h e s q
e u e s t i o n si,t i s
iutpoltant to Lur('o\el'the list'al lrene{its flom inllation-sper:ifically, how
tttnttevcteation lolers the t'osl lo fl(l\,el'nnlents
o{ running cleilcits.
H O W G O V E R N M E N T SB E N E F I TF R O M I N F L A T I O N
Governments derive fiscal benefits from easy monetary policy and
from its implied inflation in several ways. One of the more common claims is
that easymonetary policy makes the real economy strongerand thereby boosts
the tax base, so as to reduce the fiscal deficit. As argued earlier, however, easy
money does not provide any lasting or long-run boost to economic growth. We,
therefore, place no reliance on this claim in demonstrating how governments
C h a r t3
Budget of govetnment
Expendilures
Receipts
A-AAA
benefit from inflation.
More important, and often ignored, are three other basic incentives
that the fiscal authority has for the central bank to inflate: First, inflation
erodes the real value ofoutstanding government debt. Second, central bank
purchases of government debt lower the government's net interest obligation
because the interest on government debt purchased by the central bank is
returned to the government. And third, purchases of government debt by the
central bank tend to lower the real interest rates at which this debt is financed.
These inducements for inflation can be strong; yet, they are typically either
overlooked or not fully appreciated by many citizens. Let us, therefore,
explore each of them more completely.
C h a r t4
A $l5O billion deficit and how it is financed:
A hypothetical example
A-AAAA-A
Irtflation. erorlesth.e real uaLueof outstanding goaernment,debr. First, governments bene{it from easy monetary policy because inflation erodes the real
value o1oulstandinggovernmentdeht. Given today's$2.3 trillion outstanding
stock of public debt, l0-percent inflation. for example, would erase $230
billion in real government obligations annually (.Chart5). This is in contrast
to a fiscal benefit ofjust $52 billion lrorn l0-percent inllation in l9B0 and a
{iscal beneilt of only $26 billion in 1974. Thus, the fiscal benefits from
inflation {i'orn this sriurce have increasetl greatly in recent years.
Eosy m.oneyrenrns more interestpoyments back to the Treasury. A second
incentive that governments have for the r:entral bank to adopt a looser
t*%
cre.artan
nlonetary stance antl to inllate pertains to the rnatter ol interest paymenl.son
outstantlinggovernnrentdebt. When the r:entralbank purchasesgovernment
{rJilp roaf,ctuttte,
debt, the intelest payrnentson that debt return to government.For all intents
and purposes, the governmenl no longer has an interest obligation on
-/-"f,"6"*
govelnrrlentdebt bought by the central bank.
The l'ederal lleserve returns to the'l'reasury virtually every dollar of
interest earned on holdings of government securities (Clrurt 6). Indeed,
Fer[era] Reserve leirnbursements to the Treasury totaled fi264.7 billion over
the periorl 1947-90, and Feder-alReserve interest ealnings on government
securities totaled $260.5 billion-refler:ting
virtually complete reimburse-
rnent to the Treasury of Federal Reserveinterest earnings.; Thus, the creation
of rnoney by the Fedelal Reserve lowers the govelnment's interest obligation.
Eusl ntone.tknt,ersthe real inlerestrotepoid on gouernmentdebt..Covernment's
third incentive lbr the central bank to atlopt an easier monetary stance relates
to the matterol intereslratespaid on governrnentsec'urities.To the extentthat
the central bank can lorver the interest rates on government debt through the
purcrhaseo{ this tlelrt,the governmentbenefitsfrom a reduction in the debt's
interestburden.'l'houghnot unanirnouslyacceptetlamong economists,there
is evidenr:ethat the real funding cost to the Treasurv-that is, the real interest
l'ate on govelnrnent securities-is
directly related to the stock of government
debt in the econonrv and inversely related to the stock of money in the
economy.
The Federal Reselve increases the quantity oi money through open
market operations.In essence,the l'etleral lleserve'sopen market operations
leplat'e flovemrlrentrlelrtwith nervlvissuedcurlency, thereby decreasingthe
aulount of govelnment debt r-elativeto money in the economy.By the same
token, open nrarket operations.b.v r-educinggovernmentdebt outstanding,
rlecreasethe arntiuntof governrnentdelrt relative to gross national product
/2
( G Nl ) ) .l ) r ' t l i n t ' s i r rc i l h e l l u l i o l r e n e l l t h e g o l r : r ' n u r t ' nu ti l h l o r e l r e a ll i r n t l i n g
C h a r t7
Debt-to-money ratio' debt-to-GNP latio'
e a l the real interest rate
r , o s l s : t h ri ls . t l r r r l e i s a r r o l i c e a l r l e c o l r e l a t i o n l r t ' t u ' r ' e r r e i t h e r l a t i o a n d t h e land
i n t e n ' s l l i l t ( ' ( ) n l a o \ e n l l l r e nrll e b l ( ( , ' / r c 1Z1) . I n t h i " \ \ i r \ ' "J l l e r r s i e lm o n e t u r y
p o l i t ' t n o u l r l f u r l h t ' r ' r t ' t l u t ' r ' l h ct ' o s l t o g o l e l r r n r e nol [ f i n a n t ' i n gi t s t l c l i c i t s .
In atldition to the leal intelest latc eJlt'r't<'auseriby lhe slrbstitutionof
rnortt't,lirr'<lelrl.tlre go\,elnlnent'sintelrst ('ostsal'e retlucrecl
liecauseat'tive
I n t e r e sR
t a t e( P e cr e n t )
10
8
7
B
6
6
Debt to Money
5 I Batio
3
2
'65
centlal lrauk palticipatiortin {aovel'llnlelrl
bond rnalkt:lsincr-eases
the rnarl<eta b i l i t r a n r I l i q u i r l i t v o I g o v e n r n r e r rrll e b t . l n s o r l o i r r g ,t h e c e n t r a l l r a n k
tols l illing to trt <'t'pta lorvel interesl letuln lcl.rtive to that ol other inr.estlt'irrlirn'esthe rlesilal)ilit\,.fil)m the govelnnrent's
nrents.l'his litluirlitr t'11i't't
4.4
4.2
0
r r r o r r e l i z a t i or ln g o v e n t r n e nttl e b t .
poiul ol lir:1. oI t'cntlll lrarrl<
C h a r t5
Outstanding
government
debt
B l i o nD o a r s
2.500
2.000
1. 5 0 0
1, 0 0 0
500
0
C h a r t6
lnterest earned on govetnment securities versus
Fed reimbursements to the Treasury
B i I o n D o la r s
25
2A-
15
,,+
.
'75
i0
'80
- '85
. -- --+ 2
90
10
B
0.8
0.6
70
l n t e r e sB
t a t e( P e r c e n t )
Rat o
1
e n h a n c e st l t ea t t t r t ' t i r o r e s so l o u ' n i r r gg o l e r n l l l e n tr . l e l r tu. l r i t ' h n r a k e si n v e s -
4
4
Debt-toGNP
Ratio
6
4
2
0
-2
W H A T D O R E C E N TF I S C A LP O L I C I E SI M P L Y
F O R G O V E R N M E N T ' SI N C E N T I V E ST O I N F L A T E ?
We have argued that an inflationary monetary policy lowers the cost
that governmentsface for continually running budget deficits. A reason,then,
'lvhymore central banks acrossthe world don't simply set money growth so as
to have no inflation is that there are fiscal benefits-benefits
the fiscal authorities-from
that accrue to
a looser monetary policy and the central bank is
often obliged or even pressured-directly
or indirectly-to
help solve the
government's fiscal problem. Such pressures can be exhibited in a variety of
ways:through legislation or constitutional provisions that mandate the pursuit
.""lrr/lt,4
offiscal objectives by the central bank, through participation offiscal agents
in monetary policy-making at the central bank, or through such subtle means
1) /utLl,
as the central bank attempting to hold down interest rates in the face ofa rising
public debt.6
In our own nation, with recent huge increases in budget deficits and
an expanding public debt, we believe that the fiscal pressures for inflation
have intensified.
B U D G E T D E F I C I T S O F T H E 1 9 8 0 SW O U L D H A V E P R O D U C E D
S U S T AN
I ED DOUBLE-DIGIT INFLATION
To get some idea of just how great the fiscal pressures for inflation
have been recently. it is useful to consider three hypothetical monetary
policies-policies
that the Federal Reserve could have followed over the
period l9B0-90. We emphasize that these are policies that the Federal
Reserve coulclhave followed to help fund the fiscal budget deficits and ease
the Treasury's financing burden:;
POLICY A: Maintain the economl:s rotio of gorsernmentdebt to money.
POLICY B: Maintain the economl's rcttio of gouernment debt to Gl,{P.
POLICY C: Monetize a constant share of theJiscal budget deftcit.
The first two policies are important to consider because either might have
helped hold down the increase in real Treasury interest rates during the 1980s
anil thereby rnight have reduced the Treasury's funding costs.
T l r c t h j l r l l r o l i l r u c c o r r s i r l t ' r ' iosr r ei n w h i < . ht h c l . ' t ' r k , r 'lal rl s o r t .
t ' o n t i t r u e trol t t t o t t c t i z r ' F , - o \ ( ' r ' nlnr rl (r 't l rel er tl e { i t ' i t isn t h e I 9 [ J 0 st o l h e s a r r r e
t l t ' g r t c a s p l t ' r i o t r s l l - . a r ' . l l r r r nl 9 . l r 0 t ol 9 7 9 . l " o l t l r e i } 0 - v e a r p e r i o rbl e l i r l e
Char9
t
Actual and simulated
prices
l n d e x .1 9 8 2- 1 0 0
l9[]0. tht'l"t'rltlal llt'selr,e rrrorrelizerl,
on i1\,(:r'aF,-e,
r'oughlyi36 pelt.ent o{
budgt:t rlclir:its. tlrc rcrrrairring(r4 pelcent bcing linancredbv incrreasesin
privdte htilrlingso1'publit'rlelrt.l)ur-ingthe 19t30-90periotl,hol.ever.F edelal
Resclvc nronetiztrtiono{ dellcits lell to onli. J I percrent(Chrtrt8).
Untlelthese prolicies,three distin<:tlydilIer:entprice paths$()uld have
occurrerl or,er the l980-90 period-all
significantlv higher than acrtual
experience(.Clrurt9). H ad the l'eclelalRcsen'errontinuedto monetizeroughlv
36 pelcent ol the delir:it (policv C), the iiscal dellt,itsof the perioclrvoulclhave
led to inllation lates averagingrrearly I i3perccnt lirr the dec,ade,with a peak
inflation rate rif more than 2l percent in l9U2 antl l98ll. Had thr--Fcderai
Reserve.instt-'arl.actcrl to rnaintain the econorny'sstocrkof debt relative to
rnor.r{rv
tlt its level at the end of the 1970s (policv,,\), inllation n,ould have
averagcrlnrole than l 0 perc:entfor the period, reac,hinga pr:ako{ l (r percent
in l9U l . r\nrl had thc l.'etler':rl
lleservetried to avoirla rising clebt-to-(lNl)ratio
(polic,vl3).the fiscal defir:itsrloul<lhave implictl an averageof rnore than 9per('enl inllation fol the pt:r'iorl,with a high ol lT per<:entin l982.
C h a r t8
Monetization of the deficit
r 9 5 01 9 7 9
T
1980 1990
400
Financing a Constant Share (36%) of Deficit
KeepingDebt-to-GNPRatioConstant
KeepingDebt Relatlveto Money Constant
Actual
T H E F I S C A LP R E S S U R F
EO R I N F L A T I O N C O N T I N U E S
T O B U I L D A S C O V E R N M E N TD E B TB U I L D S
What the Federal Resene at'tually did over the past decade was to
policies but a comparativelyindependent
pursue none of these h.-vpothetical
monetary policv-u,hich
lesulted in slorver money growth than under any ol
the alternatives. And inflation for the period averagedonly 472 percent. This
resuit was accomplishetl b1' the Federal Reserve adopting a path for the
suppll' of nroneythat did not rnirror the path of governmentdebt (seeChans
5,7, aml 8).'l'he f'etleral Reserve did not monetize the huge increasesin
govenrment debt antl, c:onsequentlv,did not impose double-digit rates of
inflntion on the economy. But becauseof the refusal to monetizethe fiscal
'ZL,a/ c7a,aq
butlget rleli<'its.their legacv is still n ith us todav in the form of a huge stock
ol outstanclirrggovel'nmentrlelrt.
'fhe
pressure lbr the Federal Reserve to
inlltrte still existsand. intleetl,crontinuesto build as governmentdebt swells.
At t-1"1.,"**t
".1t/.
I S T H E R EA W A Y O U T ?
&*tt'*t'%*'*
I)o lisc:aldelicits oblige the central bank to in{late? Evidence lrom l7
,/
/
ruAf U /,re'le,ruerl .
OFICD countrieslol the period i9713-86 indicates that there tends to be no
ciear lelationship lretueen a c'ountrv'sinflation rate antl its cleficit-to-CNP
rati<t(Chttrt 10).rjThe Netherlnnds and Belgium. lirr example, have relatively
high rleiicit-to-(]NP ratios but have relatively low rates of inflation, while
Nonvay antl l'inlanrl have relatively lot' deficit-to-CNP ratios but have
relativelv high inl'lationrates. What, then, enables some countries,but not
others. to have lorv inflation rates tlespite high deficits?
T H E A N S W E RI S C E N T R A LB A N K I N D E P E N D E N C E
The ansr-er'.r,e lrelieve, lies in the degree of central bank indepentlence."
'l'he
evitlen<:epoints to a cleat' c'orrelationbetween central bank
irrclepenrlence
and inflation (Churt I l). When c'entralbank independenceis
high. inflation is generallylorv. But rvl.renthe t:entralbank is more t.iedto the
{iscal objecrtivesof guvernrnent. higher inllation typically results.
C E N T R A L B A N K I N D E P E ND E N C E
I S T H E K E YT O C O N T R O L L I N G I N F L A T I O N
C h a r t11
Tlre t'onclusion\\e ('olneto is stlaightlirn,arcl.Centralbank independence is lhe kev to c'ontroliingirtllation. Within govr)rr)ment.the agencrr:
controllingthe printing pre'ssrlust not lrethe sameono nlaking out the brrdget.
The peoplel ho plinl nronevantl thoservhospenclit rnustnot lre the same,and
tnust lre calelu I lv t'onstluctedto keep both groups
instil utional an'ungernents
at anll's length.
Motler
lteJliott
'Ihe
<'onclusion.rve lrelieve.is t'lear:
is otte
rva.vo{ pa1,ingfor a llscal budget defir:it.
Average inflation and centlal bank
independence in selected countries
Switzerland
Germany
Japan
UnitedStates
Netherlands
Belgium
Canada
Norway
Sweden
Denmark
France
F in l a n d
U n i t e dK i n g d o m
Australia
N e wZ e a l a n d
SPain
Italy
0
(Percent)
Inflation
Monel t'reation is the c'heapest.utosl expedientNay to pay-,
as viervetlfronr the stantlpriinlol gover-nrnents.
Monev lrealiorr. horrever,c'ausesinllation. ln lac't,it is through
1lsc'a[]rcnelits largelv accrue.
irr{latiorrthat gor,enrnrents'
lil' inflalion gro\! as
T l r t : l l s r ' a li n c e n t i r r : sa n r I l)r'essur-es
l r u r I g e t l e l i c i t sl i s e a n t l g o v e n r r n e nrtl t - l r tl r u i l d s .
A n r l g o v e r n r n e nttl e l r ti n t h e U n i t e r lS t a t c sh a s e s c a l a t e r l
sharplv in tet'ent r:ears.
of lhe l'etlelal Resen'e llithin govelnnrentis rttott:
Thu... the inrlepcntkrnt'er
e s s e n l i a tl h a n e v e l i i i n l l a t i o n i s t o l r e k e p l u n r l e rc ' o n t l o l .
C h a r t1 0
Government detacit relative to GNP
and inflation in selected countries
Switzerland
Norway
Finland
Germany
France
Australia
Denmark
Japan
United States
SPain
U n i t e dK i n g d o m
Canada
Netherlands
Sweden
New Zealand
Belgium
Italy
0
(Percent)
Inflation
+
Decreasing
Deficir,to-GNP
Ratios
Increasrng
Deficit-to-GNP
Ratios
V
15
Acknowtedgrcnt
Ihls essay was taken from the study, "Two Types af Paper.A Pimer on lhe Necessityof Cenlral Bank lnclepenclence.'writtenby W Michael Cox.
delivered ta the baard af directors of the Federal Resetve Bank of Dallas an FebruarvB. 199A at)dDrcsentedal lhe Annual Directars'Conferencenosrea
by the Federal Reserv-oBoard, April 26. 1990.
Chrrt rot€s
Chart 1
Data are from Rabert J. Barrc, l\4acroeconomcs, 3d ed. Seeendnales 1 and 3.
Chart 2
Data are trom Bobert J. Batro, Macroeconomcs, 3d ed. Seeendnoles 1 and 3.
Chart 5
Outstandinggovernment debt is measured as the par value al privately held gross federal debt. Slatisttcsare avalable frcm the Federal Reserve Bankof
Dallas.See also W. Michael Cax and Cara S. Lown, "The Capitel Gains and Losses o, lJ S GovernmentDebt. 1942-,1987 Revlewof Economicsaoo
Staflstics,vol 71 (February 1989),pp. 1-14.
Chart 6
lntetesl earned on gavernment securiltesheld by the FederalReserveand Federal Reserverclmbursementsto the Treasutyare avalable {rcm Board af
Governorsof the Federal Resetve System,Annual Repatl, 19,15-9A(Washngtan, D C. Board of Gavenars, 1946 91), table title(J"lncome and Expenses
of Federal Reserve Banks." Also, seeendnate 5.
Chart 7
Real inlerest cost is measured as lhe interestrate on one-yearcanstantmeturity Treasurysecu{ifies,adlusted t'otinflalon The debtlo,money ratrc is the
pat value at privately held gavernment debt diviciedby the Sl Louis Fed monetary base The ctebtla-GNPratia is the par value af pnvately held
government debt divided by gross nationalproduct.
Chart B
Manetizatianpercentages far l95A-79 are calculated as the total increase1nbase morrcy fram 195Athraugh 1979clividedby the cumulative(30 year)
federcl budget deficit A similar procedure was used t'arthe periad 19BA 9A.
Chart I
Actual ptice data are the GNP deflator. 9ee endnote 7 for a descriptian ol the p@cedue used ta snnutatepflces.
Chart 10
Deficitto-GNP rctios are calculated as federal budget deficits divided by GNP far each country. Data are t'ramlnlernationalFinancia Slatistics
(lnternationalMonetary Fund). Data on inflalnn are from Alberto Alesina, "Politicsand BusinessCycles in lndustrlalDemocractes " See endnote L
Chart 11
See endnate 9 far the description and source of the data.
Endnote6
' The currency measure of money used throughoutthis essayE typically referred ta as base money. Basemoney ts currency held by the non-bank
private sector plus reservesaf banks. ln an open market purchase of governmerl securlties,lhe Federal ReserremusI cteate cuilency ot the equivalent
ownersltip thercaf. Thisaureencycan be held by the nan-bank private sector (cutrency outside lhe bankng system) ar it can be owned by banks and
held eilher as reservesar "an deposit" with the Federal Reserve(currency lnslde the banking system).Thus. base money and the det'initonof cutrency
used hete ere the same.
I
To paraphrcse Sectnn Bl5) af the United StatesCanstitutian The Congress sha, have pawer ta coin money and regulate the value thercof With the
creatianof the Fedetal Beserve Systemin 1914,the Congressdelegated its responsibilityln tl|s arca Ia the FecleralReserve ln so doing, the Congress
sanctioned the separalion of ttsspending decisians from decisions regarding the way tn which such spendng wauld be financed
3
The countriesreferred to here and also in Charts 1 and 2 are of all types-d-aveloped, underdeveloped,agncultLlral.industtalized, and sa on. Data
areframRobertJ.Baffo,l\4acroeconomlcs,3ded(NewYork:JohnWileyandSons,1990).pp 153 54.
'1 Far an excellentcampilatiol of the ettectsaf nilatpn lhe rea.ler (lirected
E
ta Slanley Fiscl]erand FrancoMadigliani, 'Tawardsan lJnclerstandingaf
the Real Effectsand Casts of lnflation "WeltwirtschaftlichesAtchiv vol. 111 (1978) pp. 8lA 32.
'
Averthepeiodl94T-SS,FederalReserveteimbursemenlstatheTrcasurytateled$2194biilion
andFederalReservetnteresLearntngsan
gavernmentsecuriltestotaled $220.,1billan, lor a roughly dollarfardollar ratio.As long as the FecleralReserve has sgniicant operaling experses, it
cannat return the full value of its interestearnings ta the Treasu(yunlessit has addttianal sourcesot'income, such es dlscauntwindaw earnings or prafits
trcm pnced services. ln recent years, these ather sources of incone have roughly approximatedthe Federal Resetves ape.ahng e^penset Ove( the
past two years, plofits from operailons in loreign exchange marketshave added ]ubstantia!lyto rernbLtrsementstn e^cess ot lntetestearnngs. Seethe
March 1991Federal ReserveBulleln, p. 17,1,tor a revtew of 1990ncame and expenses.
Babert D. McTeet, Jr., in "lntercstRatesaad the Federal Beserve,'Syllogisms Cauncil an Economic Education in Maryland (Tawson Slate lJnlversty)
May/June 1982, discussesthe lssue o/pressures that deficits may put on interes[ntes and the mplicatians ol deliclts for monelarypalicy. For a I elated
d/scuss/on,see ShermanJ. Malsel, ]\,4anaging
the Dollar fNew York:W.W. Nortanand Companv, lg73)
'i
i
The economy's hypothesizedptice paths were simulated by using lhe quanlty equatian ot' exchange Denoting 1,4as the stockof cutrency (actuatly,
base money-see endnote 1), V as the velocttyof money (the average number of times that a unit af currency changes ltands per year), y as tte
ecanomy's annual real GNP,and P as the price level, the quantityequatnn says that M.V rMSt equal P.y, so thatP must equal M.V/y. As an adnittedly
crude approximatian.we estimatedP by employing this identity.using the actual values fo( V and y during the 1980 90 petDd. and wtlh maney
canforming ta whatevel values were required in order to satisfy either policy A, palicy B, or palicy C (as outlined in the text),given the actuel deficitsfor
the 1980-9Aperiod. For policy A, budget deficitswere presumed to be financed by debt aad money in the proportion necessaryto leave the economys
stock af money relativeto debt unchanged at its pre-1980 ralio (its rato at the end of 1979).Far palicy B. budget deficits werc prcsumed to be hnanced
with debt ta the degrce necessary la mantan governmenl debl relahveto GNPat lls pre-1g80 ratio (the rcmainder af the debt being financed oy rrortey
creatian).Fat policy C. budget deficits were assumed fo be financed 36 percent with maney creation and 64 percenl wth debt issuance
3 OECD refers to the Organizationfar Ecanamic Cooperationand Develapment
Seeendnote g
3 Rankings of central bank independence shown in Chart 11 are from Robin Bacleand Michael Parkin, 'Centnl Bank Lawsand MonetaryPolicy"
(lJniversityof WestemQntario,Depailmenl of Economrcs Londan, Ontaria,Canada. June 1g87,Photocopy) as tnteryretedby Alberto Alesna. "Palitics
and BusinessCycles in lndustrial Demacracles," Economic Policy,April 1989,p 81 Data an inflatianshown in Charts 1Oand 11 are fram Alestna.
lndependence af the central bank fram the executivebranch of governmentis classifiedinta faur categaries,t'rcm mast independent(Category l) ta least
independent (CategarylV): Category l-Switzeiland and Germany;Categoty il-Japan and the Unted States;Catego(y ilt-the Nethertands,Betgjum.
Canada, Notway, Sweden,Denmatk, France, Finland,and the LJnitedKingdom, and Category tV-Australia, New Zealand, Spain,and ltaly. See also
"WiseMen fram lhe South,"The Economist,Februarv2, 1991,p. 7f.
NEW
BUILDING
n I92l . the Fecleral Reserve Bank of
Dallas opened the doors of its new building at 400 South Akard St.
and began an era oflinancial leadership in the Southwest. In the
summer of 1992, this leadership rvill be reaffirrned symbolically
rvherrthe neu-headquarters building at2200 Pearl St. is completed.
The Board of Governors ofthe Federal Reserve System
approveclthe plans and budget for the new Federal Reserve Bank
of Dallas headquartersbuilding in F-ebruary1989. As a result, a
huilding site at the rrortheastr:urner of Woodall Rodgers Freeway
and Pearl Street irr downtown Dallas rvas purchased. The
gloundbreakin€lceremonvrvasheld June |21,,1990.
tr(ohn Pedersen Fux Associates of New York designed the new
building. The final building clesigndocumentationand implementation trre being handled by Sikes Jennings Kelly & Brewer of
Houston. Austin Comrnercialol Dallas is managinggeneral
contrac:tingservices."We wanted the design to be timelessexpressingstrength,stability anrl dignitv. lt has to comrnunicatethe
strong. inrlependent r.ulture oi the Southwest and inr:orporate all the
new technolog1'availa|lelo rneet the leeds of the Dallas l'ed lbr
the next 25 vears." says Richard F-lovd,project nranagerfor the
building cluringplanning and the early stagesof construction.
Throughout the 764,000-square-footbuilding, public and
plivatc areashave been thought{ully intermingled to achieve a
senseol r,ornmunityr,vhileproviding the utnrostse<urity to sensitive
areas.
Ther building rvill offer a panoranricview of clorvntownDallas
and rvill lre neur both the Arts Distrir:t and the historic Starte'fhouias
'fhis
neighborhood.
location allows the Dallas l-er[ and its
people tr.rremain an integral part of rlowntorvnwhile taking
atlvantageol the cultural assetsrif their neighbors.
BOARD
OF
Federal lleserve Bank has a nme-
DIRECTORS
Federal Reserue Bank of Dallas
EI Paso Branch
Head Offi.ce
member board of directors that overseesoperations under the
C h a ir n r a n :
general supenrision of the Board of Governors ol the Federal
ReserveSystemin Washington,D.C.'fhese directors are chosen to
represent various interests and concerns within their District and
\rlnr. []olrlrr I'i. lrrrnarr
[ J . S .\ a r r
(retrnl)
Priratelrrrestor
Owncr
S t e v e n sO i l C o .
lloslvell. Nelv Mexico
Austin-'l'eras
Clrairnrarr l)ro Tern:
bring to the boards a broad range of expertise. The nine directols of
l)eputr Chairnran:
i\laj. ()en. Hugh (). ltobinson
the Head Ofllce board are divided into three classes ol three
U.S.,\rrrn (retired)
(lhaiunan ol tht,[]oarrl arrrl
each-Classes A, Il and C. Class A directors represent the member
llh ai rnriur:
l ) o r r a l t l( 1 . S t e v e n s
W. Thornas Beartl. III
Presiden I
l,eoncilaCattle Co.
,{lJrint:.'l'exas
( l h i e 1 l' , x e c u t i r e O f l i c e r
'fhe'l'elra
Cloup Inc.
llenn B. Ellis
l)allas.'fcxas
I'resirlertt and Chie{ Credit Officer
CharlesT. [)orlc
Fll ltaso.'l'exas
come from such backgrounds as agriculture, comnerce, industry.
C h a i r n r a r ro f t h e l J o a r c la n d
( l h i c f l l x c c u t i r e O f f ic e r
W avne Merritt
service,labor and consumer groups,among others. Member banks
(]ulf \ational lJank
commercial banks throughout the District and are usually bankers.
Class B and C directors are selected to represent the public and
l\4Bank El Paso. N.A.
Teras Citv,'l'r'xas
in the District elect Class A and B directors, while the Board of'
'l'.C.
Covernors appoints Class C directors.
Directors who ser-veon the boards oi Federal Reser-ve
President
( i l a y r l e s t aN a t i o n a l B a n k
'l'exas
Mirlland.
l'rost
Chtrirnran of thc Boall
Diana S. Natalicio
l.lrst National llank
'fexas
San A ntonio.
The University of l'exas at El Paso
President
!ll l)aso,'fexas
Branches are not elected but are appointed by the merlbers of the
'Ihese
Head OITice board of directors or by the Board oi (lovernors.
Robert C. Creer
(lhailnan ol thc l]oall
'l'arrgle*orl
llank. N.A.
Flthel Olson
( J\\,ner
seven-member boards consist of four mernbers appointed by the
Houstorr.'li'ras
NA\illlE of ltuirloso
Head Office board and three members appointed by the Boaltl of
Covernors. The Branch board members also are r:hosento l'epresent
banking as well as public and businessinterests.
Ilu itloso. N erv Mexic'o
l , e o l l . l , i n b e c k .J r .
H unrlrerto l'. Santbranr
C h a i r n r a n o l t h c l J o a r r la n r l
(ihief l}e cutir e Ollicer
l.inbet k Conslruclion (lorp.
itresident
SanrCorp Gcneral (lontrat:krrs
Horrston.'ll'ras
lll l'uso. Texas
I t o b e r t 1 , .I ' l l u g e r
Horcton Branch
Dach board meets once a month, and the members confer r.rn
ReserrteBank managementdecisions as well as economir.,<'onditions
and monetary policy. Board members play a direct role in the Bank's
managementbecausethev are responsihlefor appointing the Resene
Bank president and first vice president, subjer:tto the approval ol the
l l a n l h er
San '\ngelo"'l'exas
Chairnran:
Antlrew 1,. Jelierson, Jt.
(larv Fl. \\ rxxl
AItornct
I ) r e si r l e n t
'l'exas
Research League
Jefferson and l\'lirns
IIouston"'l'exas
' \ t r s t i n "T e x a s
I)erlon \ ates
'l'enr:
Chairnran Pro
(lilbert D. Claedt:ke
[ ) r e s i rl e r t l
Chairnran of the lJoard and
\ atesl)rillingCo.
Chiel lixecutive O{llcer
(lactk:ke Etluipnrent Co.
Board of Covernors, and for appointing all other oilicers o{ the llank.
They are responsiblefor the Bank's budget and expentlituresand. in
addition, review the annual intemal audit program.
I)irectors play a vital role in the lormulation of monetary
Arlesia. Nerr l\4erico
H o u s t o n "T e x a s
Fedenil Aduisory Council Member
Jurlv Ley Allen
policy through their advice and counsel to the Reserve Bank
president. They provide firsthand economic and {lnancial inforrnation as input for meetings of the Federal Open Market Cornrnitteethe top monetary policy-making urrit of the Federal Reserve
System.In addition, directors recommend,subject to review and
determination by the Board of Governors, the discount rate to be
charged by the Federal Reserve Bank.
'sn
Iilrnall (1. Steinhart
Allcn Lrvestments
Chainnan o{ lhe lloarrl anrl
( . l h i e fE x e c u t i r e O f l i c e r
'l'eanr
lJank
llouston, Texas
Jeff Austin, Jr.
I)allas.'li'xas
President
l'irst \ational llank of Jacksonville
J a c k s o n v i l l e ,T e x a s
ADVISORY
Jenard N'I.(lross
COUNCILS
F inanc ial I nstitut io ru
Small Busiress and, Agricuhure
Cross []uiklers Irrr'.
J a r n e sA . A l t i c k
J. Wat'land Bennertt
Houston.'fexas
Presitlent antl Chief Flxer:utive 0{llcer
Charles C.'fhompson Pro{essor
Presirlent
Clive Ilunnells
Ccntral Bank
Emeritus
\fonroe, Louisiana
Texas'l'et'h University
[,uhbot:k, Texas
Presirlent and Diret tor
Mitl-Coasl Cable'f ekrvisirn Int .
Arno Easterlv. Jr.
El Canrpo" Teras
Presitlent anrl Chief Executive OJI]r:er
Davirl !1. Sheffieltl
Patrick E. lJoyt
Barksdale f'ederal Credit Union
Managing Partner
tsarksdale A.F.B., l,ouisiana
P.li. Boyt Farms
Devers, Texas
Presirlent (retirtrl)
First Vittoria National Barrk
Flverett C. Garnbrell
Executive Vir:e President
John S. Cargile
Texas Conrrnerce Ilank
President
San Antonio Branch
l-louston, Texas
Producers Lilestock Auction
Chairnran:
W. Cene (larrison
Iloger ll. Hemminghaus
Chairman of the l]oard
J.B. Cooper, Jr.
Chairnran of the lJoanl. Presirlenr anu
l'irst National Bank-Alice
F-armer
Chief Flxct'utive 0{iicer
Alice, Texas
Rost:oe,'l'exas
Victoria" Texas
San Angelo. Texas
Dianrontl Shamror:k lt&M ln<:.
'feras
San Arrtonio,
Paul Crar.
Ron Davenport
Senior \-ice President
0wner
Chairnran I'ro'Iem:
NCNB Texas National Bank
Davenport Cattle Co.
l,aurente !1. Jenkins
Dallas,'l'exas
Friona, Texas
Jarnes 1,. llawkins. Jr.
Robert D. Dooley
Senior Vice Presidenl
Partner
Vice President (retired)
L,', kh,
Vi".il.r
",1
Austin.'li'xas
E Spa,e C .
f irst National Bank in Alarrxrgordo
Cregorv W. (irane
Alanrogordo. Nerv Mcxico
KPMC Peat Manvick
'fe-ras
l)allas,
Chairnran of the Boartl. Presirlent and
Chie{ llxecutive 0{licer
Carter Kelly
i\nnette Bailey Hamilton
Broarlua\ National Bank
Exet:utive Vice President
Chairman o{ the Boartl
San '\ntonio.'fcxas
The l'irst National Bank ol Amarillo
A n n e t t t : 2 C o s m e t i q u e sl n c .
'fexas
Amarillo.'l'exas
Dallas.
Javier (larza
Executive V ice ltresident
'Ihe
l,arerlo National Bank
[)elton P. Mrxrre
Lois l-arfel Stark
Chairrnan
President
l,aredo.'l'exas
Texas Credit Union League Manager
Stark Productions Inc.
Texaco PAW Lmployees
Houston,'l'exas
Federal Crerlit Union
'l'exas
Port Arthur,
William P. Stephens
Jane Flato Srrrith
Inve-slnrenta
s n d R a n t ' hi n g
'fexas
Executive Dire<:tor
San Antonio,
J.W. I'ieper
l a r n r u n t l R a n c l rH e r i t u g eI n - l i l u l e
Sam ll. Sparks
SeniorVice President
L,as Cruces, Nerv Mexit:o
Presitlent
I'irst Citv National Bank of l{ouston
S a n rI l . S p a r k s I n c .
'l'exus
Progreso.
Houston, Teras
Farnrer
l . o r v e l lS m i t h . J r .
Erich Werull
Chairman o{ the Roard anrl Presitlent
Pres irlent
First State liank
'I'exas
Rio V ista.
Maverick Markets Int'.
L.C. Unfred
Nelv [.lome, Texas
Jeffrey W. Wilson
President
L a l t l e [ J a r o nl l e r k
Corpus Christi,'fexa-*
Kertneth A. Trapp
Hou.r lnr'.
Roswell, New Mexictr
!-xecutive \rice President
E{lective l)ecemberi]I. 1990
I'rost National Bank
'l'eras
San Antonio"
Carlos A. Zuniga
V ice President
Zuniga Freight Servir:es Jnc.
Larrv Z.'fruax
Laretlo, Texas
President antl Chief Exet utive Olii<:er
Honre l"etlcral Sarings Bank
of Nerv Mexit'o
Denring, Nerv Mexico
Fl{Iective January I, 1990
STATEMENT
OF
CONDITION
Detenber 31, 1990
(Thousa.ntls)
Detetnber31, J9B9
('l.housontls)
ASSETS
Gold certificate accountl
$
S p c , :i a l d r a wi n g r i g h t s c e n i f i ( ' . r t ea ( . c o u n t 2
Coin
L o a n s t o d e p o s i t o r li n r t i l u t i o n s
585,000
463,000
M,T:JI
22,900
$
613,000
433,000
39.231
27,503
Securities:
Federal agency obligations
U.S. government securities
I otal securltles
Items in process of collection
Bank premises (net)
Other assets
Interdistrict settlement accounl
TOTALASSETS
226,345
8,390,883
.$ 8,617,228
977,079
71.551
2,704,39:l
986,328
$11t{?ryr16
274,r19
9.527,526
$ 9,801,645
753,758
25,356
4,088,643
(1,511,417)
#14,27A,719
$11,481,291
$11,r66,011
LIABILITIES
Federal Reservenotes
Deposits:
Depositoryinstitutions
1.756,755
I I,400
7
"046
Foreign
0ther
Total deposits
Deferredcredit items
OtherIiabilities
TOTAL LIABILITIES
$14J02J42
CAPITAL ACCOUNTS
Capitalpaid in
$
Surplus
TOTAL CAPITAL ACCOUNTS
TOTAL LIABILITIES ANT] CAPITAL ACCOUNTS
tNi,zzs,zot
745,829
99.821
184,737
r84.,737
$ 36el?4
$r4.471.616
tThis llattA': $arc 'tJ
r,
tuth
' T h i : & t n A . * s h u t , ' f y ' eg,l,l
c i , l , l r . tntJi.,'n:s
u o t g r i g h ttkpoiterl
s c e r t i [ u . l Ilttt e the
r ( k ] Ii.S.
\ ) s i t eTreosurt
db||hcI|.S
. T r uthe
u u rF'edttul
l u . i t h t h eRt'rerre
. F e e r t iSxtear.
I|e
1,948,763
11,250
67,408
# \02?,4
616,847
$13,929,589
$
170,565
170,565
q -i4l,r?!
$I4.270.719
STATEMENT
OF
OPERATIONS
For the year ended December3l
ISSS
t990
(Thowanls)
(Thowand.r)
CURRENT
INCOME
Intereslt,n ]oans
I n l e r e s l o n g o v e r n n t F n ls e c u r i t i e s
J n r ' o m eo n f o r e i g n ( ' u l r e n ( ' y
Income Irorn priced services
Otherincome
T o l a l t ' u r r e n ti n c o m e
32,125
744,950
I97,734
49,787
728
$1,025,324
$
$ 211,730
917,443
78.316
48,079
1,0r5
tfrr"r56,seJ
CURRENT
EXPENSES
C u r r e n t o p e r a t i n ge \ p e n s e s
$
Les' expens"s reimhurserl
Current net operating expenses
C o s t o [ e ar n i n g s c r e d i t s
current net expenses
CURRENTNETINCOME
#
92,3s8
6,336
86,022
__g,ffq
$
-;
if
87.6r6
6,061
t]l.JJ)
7,744
$ 92.870
ff 932,4s4
fi 8r2r,
2,24Q
162,594
41
164.875
$
$25
92,320
16
92,361
$
{B1,167,284
PROFITANDLOSS
Additions to cunent net income:
P n ' [ i t o n s a l e s o f g t r r e r n m e n ts e c u r i l i e s ( n e t J
Profit on ibreign exchange transactions (net)
Other atltlitions
Total additions
fi
Deductions from current net in(.ome:
Loss on foreign exchange transactions (net)
0
Other deductions
a
Total deductions
Net additions (deductions)
Co"t ol nonreimlrur"aLrle
Treasurl services
ct
$o
l
+r
a - .
92,360
$ 164,873
4,2?B
$
$
7,937
8,911
$1.076.197
s 6,562
_-9,8!1
$i,241,1"51
q.
,'7i1
Assessment by Board ol Governors:
Expendiu
t res
Federal Reserve currency costs
NETINCOMEAVAILABLEFORDISTRIBUTION
$
STATENAENT
OF
SURPtUS
l'or tha yttr
cndtrl Decenber ,31
tr90
l9u9
(Thoustnuls)
(Tltoustnds)
Surplus,January I
Net incomeavailablefor distribution
LESS:
$ 170,s6s
1,076,r97
$ 158,031
r,241.45I
Dividendspaid
Paymentsto the U.S.Treasury
Net amount transferredto (from) surplus
Surplus,Decemberll1
11"027
1,050,998
$ r.x,r72
$ 184,737
9,328
1,219.589
$ 12.534
$ 170,56s
VOLUME
OF
OPERATIONS
District Summary
Nurnber of Pietet Ilondlul
t990
Currency received an<l counted
Coin received and counted
Food stamps redeelned
lranslers ol tunrls
1q89
959,597,700
727,955.79t
3r9,719,912
I.012,861,100
803,788,459
248,706,000
6,747,065
6,717,,474
D oll.or Am owi ( Tlnuscnd.s)
I q89
t990
t3,559,9r2
r 11,793
1,672,384
t4,412,556
r49,561
a na|
Aol
10.:i6B,i]47.128 10,566.()-r2.229
CHECKSHANDLED
U.S. governmentchecks
Fine sr.rrt
All othert
34,397.594
:JB:J,290,202
r,r29,5:J4,456
33.762,656
:113.701,988
I,109,78U.622
49,r,\4"36i
96,459"566
570,465,998
44,881,99r
84,985,195
575,841,535
:J78,729,990
39,044,581
333,366,399
27
"473,447
ACH ITEMS HANDLED
Commercial
Government
91,458,412
41,739,399
77,391,770
33.996.160
COLLECTIONITEMS HANDLED
U.S. governmentcouponspaid
Ali other
17"827
277.864
19,682
291,651
22,736
770.545
8..t17.607
765.177,14:]
3,235
4.591,018
10,483
7].2,502
ISSUES,REDEMPTIONS,
EXCHANGESOF U.S.
GOVERNMENTSECURITIES
Definitiveand book-entry
6.350.898
511,327,620
LOANS
Adyances made
1,750
tFlxclusiue of checksdranun
rn Federal ReserueBartks.
9/t
r 50,928,502
OFFICERS
Fed,eral ReserueBank of Dallas
Head Office
Gerald P. 0'Driscoll, Jr.
Vice Prt:sident and
Van \4.Hosas
r\ssistantVice President
Associakr I)irectol of Rese'arch
RoberrH. Bovkin
Presidentanrl
Chiel Erecutive0f{lr:er*
GeorgeC. Cochran,IIJ
SeniorVice ltresirltnt
L)ean A. Pankonien
Vice Presitlent,
Assistant (]eneral Counsel
anrl Assistant Secretary
l-arry J. Reck
Jay K. Mast
SeniorVice President
Vice President
Jesse l). Sanders
Haner Rosenblunr
Senio' !'ice Presirlcntancl
Directorof Research
Vice PresidenL
Cenie D. Short
Vice President
Tony J. Salvaggio
SeniorVice Presidenl
Larry 1\{.Snell
Vir:e President
JamesL. Stull
SeniorVice Presidt:nt
Philip R. Spear
A-si>lanV
l icePre.idenl
'furner
V i r h a e lN .
AssistantVice President
StcphenM. Wrlch
AssistantVice President
Muion E. While
AssistantVice President
Thomas H, Robertson
Vice Presidentin Charge
T. Her$ Barbee
AssistantVice President
John A. Bullock
AssistanlVice President
ThomasC. Cole
AssistantVice President
Richard A. Gutierrez
AssistantVice President*''
R , r h e r Ll . \ [ h i t m a n
AssistantVice President
EliectiveJanuaryl. 1991
W. ArthurTribble
Vice Presitlent
Millatl Fl.Sneatt
SeniorVicc PresidentCeneralCounselanclSet,rotary
llobert J. Rossalo
AssistantGeneralAurliror
San Antonin Brarrch
B u l ' W .W i l l i u r n s
AssistantVit:e President
*l{obel H. Boykin, president and
I h r F l r ' \ e c u l l \e ' ) l l r I p r . r e l r r e d
UzziahAnderson
AssistantVice President
Emilie S. Worthy
AssistantVice President
J a n u a r y3 1 . l t l l l .
Roherr D. \'lt Teer, Jr.. b"came
president and chief executive offi cer
I-yne H. Carter
Vice President
B a s i l J ,A s a r n
AssisiantVice PresidenI
Bob G. Moore
Senior Project Manager
J a c kA . C l y r n e r
Vice President
StephenP.A. I3rown
AssistantVice Presidentand
SeniorEconomisl
EI PasoBranch
retired Decemher 3 l. | 9q0.
S-C.Clay
Vice Presidentin Charge
+*Uflertire Fehruarl l. l99l
Fehruarl l. 199t.
W i l l i a m H . W u l l a c e .f i r s l v i r e
presidenl and chief operating officer,
W . M i c h a e lC o x
Vice Presidentand
Econonic Advisor
RichardJ. tsurda
AssistantVice President
Javierll. Jimenez
AssistantVice President
Billy J. Dusek
Vice President
'ferry
Billy D. Fuller
Vice President
M. I)on l)orsey
AssistantVice President
HoustonBranrh
Joseph'l'.Cholson
Vice President
RohertG. Feil
AssistantVice President
RobertSmith III
S e n i u rV i c e P r e s i r i e ni ln L h a r g c
Robert fJ. Hankins
Vice Presiclent
Andrew W. Hogwood,Jr.
AssistantVice President
Verrron L- Barlee
Vice President
Jerry [,. HedicL
Vice President
Johnnl L. Johnson
AssistantVice ['resident
Ren6 G. Gonzales
AssistantVice President
Helen I-1.Holcontb
Vice President
C. LaVor Lym
AssistantVit:e President
Lulher E. llichads
AssistantVice President
Joel [,. Koont,e,Jr,
Vice President
JamesR. McCullin
Ass:istant
Vice President
RobertF. Langlinais
Vice Presidentand
CeneralAuditor
John R. Phillips
AssistantVice President
RebeccaW. Meinzer
Vice President
Larry C. Ripley
AssistantVice President
B. Campbell.
AssistantVice Prersident
J. EloiseGuinn
O p e r a l i u nO
s flir:cr
Federal ReserveBank of Dallas
400 South Akard Street
Dallas, Texas 75202
(214)
6s1-6ul
El PasoBranch
301 East Main Street
El Paso,Texas 79901
(9r5)s44-473o
Houston Branch
1701 San Jacinto Street
Houston, Texas 77002
(7r3)6s9-4433
San Antonio Branch
126 East Nueva Street
San Antonio,Texas 78204
(sr2)224-2r4r
@FedFRASER