Full text of Annual Report of the Federal Reserve Bank of Dallas : 1996 Annual Report : The Economy at Light Speed: Technology and Growth in the Information Age—And Beyond

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Federal Reserve Bank of Dallas
1996 Annual Report

The Economy at Light Speed
Technology and Growth in the Information Age —And Beyond

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TA B L E O F C O N T E N T S

A Letter from the President . . . . . . . .1
The Economy at Light Speed:
Technology and Growth in the
Information Age —And Beyond . . . . . .2
The Year in Review . . . . . . . . . . . . . .18
Corporate Executives
and Senior Management . . . . . . . . .21
Boards of Directors . . . . . . . . . . . . . .22
Advisory Councils and Officers . . . . .24
Selected Financial Information
• Statement of Condition . . . . . . . . . .25
• Statement of Income . . . . . . . . . . . .26
• Statement of Changes in Capital . .27
Volume of Operations . . . . . . . . . . . .28

A LETTER FROM THE

|1

PRESIDENT

The Federal Reserve Bank of Dallas

today. Our rationale for exploring the

has projected optimism in our recent

possibilities here is to counter the pes-

annual report essays—optimism that

simism generated by current growth and

the creative destruction of jobs renews

productivity statistics, which seem

and reinvigorates our economy (“The

increasingly inadequate for our third-

Churn: The Paradox of Progress,” 1992);

wave service and information economy.

❧

optimism that our living standards are
continuing to rise, as shown by the way

1996 was a good year for the Federal

we live our lives (“These Are the Good

Reserve Bank of Dallas. Our banking

for me the prototypical gentleman

Old Days,” 1993); optimism that our

system remained sound, our regional

Texas farmer. Peyton Yates left the

evolution toward a service economy is

economy continued to outpace the

Dallas Board in April 1996 and was

not a bad thing (“The Service Sector:

national average, and we fully recov-

replaced by Bob McNair, who had been

Give It Some Respect,” 1994); and opti-

ered the cost of the services we pro-

serving on our Houston Board. We will

mism that our dynamic economy still

vided to our customers. Productivity

miss J. B. and Peyton. We will also miss

offers plenty of opportunity for individ-

improved as we continued to provide

Erich Wendl, who retired from our San

uals to move up (“By Our Own Boot-

more services with fewer employees.

Antonio Board; Walter Johnson, who

straps,” 1995). In short, we have chosen

Our public programs and educational

retired from our Houston Board; and

to see the glass half full rather than half

activities were well received by larger

Veronica Callaghan and Ben Haines,

empty. We have confidence in the

audiences. We expect more of the

who retired from our El Paso Board. All

power of our free enterprise economy to

same in 1997.

have made valuable contributions.

produce rising living standards.

❧

Internally, the most significant

This year, we may be going too far,

At the end of 1996, Cece Smith com-

management changes in 1996 were the

projecting our optimism well into the

pleted three years as chairman of the

retirement of Tony Salvaggio on April

future. As a former economist, I’ve

Board of Directors of the Federal

1 after almost 40 years of distinguished

learned that forecasting is not too haz-

Reserve Bank of Dallas and turned the

service, and the appointment of

ardous, as long as it isn’t about the

chairmanship over to Roger Hemming-

Helen Holcomb as our new first vice

future. I’ve also learned that optimists

haus, who had been serving as deputy

president.

have a better track record than pes-

chairman. During 1997, Cece will

Innovation and change are inherent

simists. Besides, by 2020, I’ll be retired

serve the last of her six years on the

components of our free enterprise

and so, probably, will the authors of

Board as deputy chairman. I appreci-

economy and, I believe, of our great

this and the other essays cited above,

ate the valuable contribution Cece has

strength. Therefore, our optimism

Mike Cox and Richard Alm.

made as chairman. She’s a great boss.

continues both for our world and for

Their hook in this essay, and the

1996 also saw the retirement of

reason you may want to take it more

Dallas Fed Director J. B. Cooper, after

seriously than a science fiction comic

six years of service on the Board and

our economy.

book, is that their high-tech world of

after previously serving on our Advi-

2020 is based on applications and

sory Council on Small Business and

Robert D. McTeer, Jr.

refinements of technology that exists

Agriculture. J. B. will always remain

President and Chief Executive Officer

2

The Economy at Light Speed
Technology and Growth in the Information Age —And Beyond

Fast-forward to life in the year 2020.
Though it’s an overcast
winter morning, Steve and
Kim Jones wake to a sunrise
of sea gulls and warm salt-air
breezes, all synthesized by their
Sensual, Audio and Visual
Virtual Information and

IMAGE BANK

Entertainment system.

by W. MICHAEL COX
and RICHARD ALM

Imagination is
more important
than knowledge.
—Albert Einstein

T H E E C O N O M Y AT L I G H T S P E E D

A fixture in most middle-class homes,

alized to reflect their interests. After a

SAVVIE regulates the indoor environ-

report on China’s efforts to clean up

ment and operates 50-odd computer-

the environment, Kim wants an update

controlled appliances, among them the

on the Chinese and American Mars

Joneses’ bed. All night it reads body

colony. Steve requests an interview

shapes, weight, temperature and posi-

with Cowboys head coach Troy Aikman,

tions, adjusting to ensure the couple’s

preparing for Super Bowl LIV. Business

complete comfort. The bed gathers data

news starts with the latest on around-

on each snoozer’s heart rate, oxygen

the-clock stock trading, showing the

intake, bone density, neurological activi-

Dow Jones industrial average surging

With gears the width of a human hair, this

ties and other vital signs, all of it logged

past 31,000.1

micromachine component includes a linear

into a memory bank that compiles a
daily health report.

|

Tiny robots scrub the dishes and run

rack, rack guides, a drive gear and drive

a whisper-quiet vacuum cleaner as

linkage to convert rotational motion into

After showering and dressing, Steve

Steve remarks to Kim, “TGIT”—Thank

linear motion. Photo copyright Sandia

says, “Breakfast, Max.” He’s speaking to

God it’s Thursday. Like most Americans

National Laboratories.

the family’s intelligent agent, Maxwell, a

in 2020, Steve works from 9 a.m. to 4

book-sized computer that commands

p.m., Mondays through Thursdays.

ularly engineered composites that are

the SAVVIE appliances, maintains the

Steve has Max make reservations at the

stronger than steel, lighter than plastic

home’s environment and handles the

local sports cybercade, a virtual reality

and cheaper than either. Most days,

family’s shopping via the Internet. Max

club that simulates hang-gliding, skiing

Steve works from home or his vacation

comes with its own personality. On

and other outdoor adventures. Having

cabin, when necessary using his telecon-

hearing its name, Max activates the

fallen three times, Steve is resolved

ferencing port to hold virtual meetings.

floor-to-ceiling video wall in any room

to complete his conquest of Mount

Sensors follow Steve’s eyes, changing

and answers in the charming Scottish

McKinley. After reviewing Steve’s daily

the image on the video wall to match his

accent chosen by the Joneses, “Good

health report, Max says, “Along with

slightest shift in focus. With a word to

morning, sir. What would you be having

your usual vitamins, I’m recommending

Max, Steve can consult with colleagues

for breakfast today?”

a wee extra bit of molybdenum to build

in Thailand and Argentina while working

stamina for tomorrow’s climb.”

with a customer in Egypt. Language

Steve orders bacon and eggs without
a twinge of guilt. In 2020, most foods

Steve works for International Micro-

have been genetically engineered to

tools Inc., a consortium that makes

maintain taste and texture but provide

machines small enough to maneuver

After kissing Steve good-bye, Kim, a

optimal nutrition with less fat and choles-

inside the human heart. He designs them

doctor, leaves for work in her nonpol-

terol. As Steve and Kim eat, they ask

on a three-dimensional computer screen,

luting vehicle powered by superconduc-

Max for the morning newscast, person-

tailoring each tool to the customer’s

tive batteries that require recharging just

exact specifications. With a single key-

once a month. There’s no need for a

stroke, he sends his designs to facto-

key: the car identifies her by voice and

ries, where durable-product generators

smell. Kim speaks only a simple com-

fabricate the tiny machines from molec-

mand, “Max, the office, please,” and

1 This number is not pulled from thin air. The
Dow ended 1996 at 6,448, and matching the
long-term growth of 7 percent a year would
put the index above 31,000 in 2020.

processors translate Steve’s English into
Thai, Spanish and Arabic.

3

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Nanotechnology researchers are growing
carbon nanotubes from which they someday
hope to build ultrathin metallic electrical
conductors. By polymerizing carbon into a continuous, perfect graphene tube with metal
atoms sealed inside, researchers make
nanowires that have the potential to be as
conductive as copper and 100 times stronger
than steel. Photo copyright Rice University
Center for Nanoscale Science and Technology.

the car responds. Steering, acceleration

and virtual reality provide indelible learn-

and braking are self-controlled, with

ing experiences — the sights, sounds

continuous feedback from the Coordi-

and feel of rocketing through Saturn’s

nated Travel Network linked to naviga-

rings, a touch-of-a-button tour of the

tional satellites that pinpoint a car’s posi-

Louvre. After school, Jane designs a

tion anywhere on the planet. Computers

new outfit, using 3-D scanners to per-

and sensors in cars and roadbeds pre-

fect the fit and laser-guided machines to

vent collisions. As she travels to the

sew it. Ben and his pals play baseball on

office without fear of accident or break-

a holographic field that offers the real-

down, Kim catches up on her work by

ism of the Texas Rangers’ ballpark.

accessing the American Medical Associ-

That evening, Steve and Kim meet

ation’s Internet site on the vehicle’s

the Mings and the Huxtables at the

video display.

Eclectic Rouge, a restaurant that offers

The emphasis of medicine in 2020 is

a choice of ambiance as well as entree.

on preventing disease and managing

It’s Kim’s birthday, so she chooses a

the aging process. With new vaccines

Parisian sidewalk cafe for appetizers

and treatments, cavities, baldness,

and the main course, then fireside at a

arthritis, hearing loss and the common

Colorado ski resort for coffee and

cold rarely afflict Kim’s patients. She

dessert. After dinner, the three couples

analyzes patients’ DNA to assess the

head to the Jones home, where satellite

risk of illnesses before they occur.

linkups and fiber optic cables deliver a

Where necessary, DNA therapy allows

world of entertainment— everything

her to implant healthy genes for those

from Las Vegas shows to symphony

producing Alzheimer’s disease, multi-

concerts and action movies. Thanks to

ple sclerosis and heart ailments. Kim

the latest holographic device, viewers

prescribes drugs that have slowed

can walk inside the film and even talk

aging and stopped cancers, and she can

with the characters. After a final cham-

order cloned blood, skin, bones, organs

pagne toast, the Joneses’ guests hop

and the latest biotech breakthrough.

into their self-driving cars for a safe trip

The Jones children—Jane, a teen-

home, and Steve and Kim retire for the

ager, and Ben, age 10—attend neighbor-

evening, bidding Max to put out the

hood schools, where teleconferencing

dog, lock up and turn off the lights.

T his vision of 2020 may sound farfetched— a pipe dream, worlds away
from today. After all, the rapid progress
implied by the Joneses’ lifestyle runs
counter to well-publicized reports of
an American economy whose growth
rate has slipped. Pessimists, citing
statistics on weakening productivity
and gross domestic product growth,
contend that the economy isn’t strong
enough to keep hoisting Americans
upward. They offer a dour view: the
generation coming of age today will be
the first in American history not to live
better than its parents.
One simple fact, however, suggests
that this view will be proven wrong—
and spectacularly so: nothing conjured
up in this vision of 2020 requires any
new technologies. Every device in the
Joneses’ lives uses 1997 science and
technology, honed by a competitive
economy into the next generation of

T H E E C O N O M Y AT L I G H T S P E E D

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With a little help from the Jason V Primary
Interactive Network and live satellite broadcasts, schoolchildren in Massachusetts
explore coral reefs off the coast of Belize
by guiding underwater cameras mounted
on a remotely operated vehicle. Research
scientists answer students’ questions,
demonstrate on-site research techniques
and even quiz students on their observations.

Technology and
Capitalism —
Partners in Progress
Few Americans would deny today’s
technology explosion. Even in this
era of supercomputers, space travel
and cloning, though, technology isn’t
always seen as a boon. Amid the
modern world’s hustle and bustle,
nostalgia for the simpler ways of
goods and services.2 With a mother

greater variety, more time off, better

times past is not uncommon. Techno-

lode of technologies ready to shape the

working conditions, more enjoyable

phobes cringe at programming the

next quarter century, there’s reason to

jobs and other benefits. All of these

VCR or installing new peripherals on

believe that progress will be faster than

raise our living standards but by their

the PC. Apocalyptic literature, science

ever —a stunning display of capital-

nature aren’t easily measured. Most

fiction

ism’s ability to lift living standards.

aren’t even counted in GDP.

rhetoric portray technology as a dark,

movies

and

neo-Luddite

Ironically, though, our economic

What the next quarter century of

statistics may miss the show. The

capitalism likely promises, then, is

That is the technology of myth. The

usual measures of progress—output

a silent boom—a rapid economic

technology of reality is a vital part of

and productivity—lose touch in an age

advance that will improve everyday

what spurs economic progress and

of rapid technological advances. As the

life but elude the regular readings of

raises living standards. Stone Age

economy evolves, it delivers not only

the economy’s vital signs. Statistical

“high-tech” was knowing how to strike

more production but also new goods

tools simply can’t keep up with an

flint on rock to produce a spark and

and services, improved products,

economy moving at light speed.

ignite a fire. But even at that basic

3

dehumanizing force.

level, technology improved the lives of
2 Americans will doubtlessly enjoy the fruits of even further advances in technology over the next
25 years. To suppose otherwise would be to exhibit the shortsightedness of Charles H. Duell,
commissioner, U.S. Office of Patents, who in 1899 said, “Everything that can be invented has
been invented.”
3 The discrepancy applies to the past quarter century as well as to the future. The Dallas Fed’s 1993
annual report essay, “These Are the Good Old Days,” presented overwhelming evidence that the
average American has a lot more than ever before. Yet the national accounts report only slow growth
over the previous two decades. In their article “1974,” Greenwood and Yorukoglu (forthcoming)
explain how the measured productivity slowdown over the past two decades may have been related
to the rapid technological advances associated with the computer.

those who used it. They kept warmer at
night, ate hot food and slept more
soundly, worrying less about attacks
by saber-toothed tigers and marauding
tribes. Fast-forward through the millennia, and it’s the same story. Today’s
technology is much more complex,
but it still makes those who use it bet-

5

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Blending electronics with biology, neuroscience
researchers have achieved long-term functional viability
of cells treated with ions and implanted these cells into
study animals. In the not-too-distant future, researchers
hope to use the technology to treat neurodegenerative
diseases such as Parkinson’s disease.

ter off. We are warmed by gas and

merger. In California’s gold rush era,

electric furnaces, nourished by food

meeting might have meant a boat trip

heated in microwave ovens, and pro-

around the tip of South America. As

tected by locks, alarm systems and

time went by, the bankers would have

911 operators. Technology leads to

found the train faster, then the airplane

new products and services that

faster still. With the advent of telecon-

improve our everyday lives. It must.

ferencing, they can now convene in a

After all, every innovation must pass

matter of seconds, skipping the hassle

the test of the marketplace: if people

and expense of transcontinental

don’t want it, they won’t buy it.

flight. Sometime beyond 2020, virtual

4

But technological know-how doesn’t

meetings and all modes of shipping

just happen. Ideas are sterile until an

may be made obsolete by a Star Trek-

entrepreneur or a company transforms

like “transporter” that zaps people and

them into new goods and services or

products from one place to another.

better production methods. The process

In a free enterprise system, there’s

involves discerning consumer tastes,

always competition from inventions

researching,

prototypes,

and innovations that meet consumers’

obtaining financing, manufacturing,

needs in a different way or make it

helps us see what speeds it up or slows

marketing and, often, starting all over

cheaper and easier to manufacture

it down.

again. Blood, sweat and tears. Why go

existing products. Most of us overlook

Because technology in large part

through it?

this “minor” feature of a market-based

drives growth, stepping up the pace of

designing

Profit. Capitalism gives incentives

economy. When we catch a bargain on

invention and innovation increases

to innovate by bestowing profit on

airfare, see our long-distance phone

the speed of economic progress. As

those who bring successful products

rates plummet, get a good deal on a car

with most economic activities, putting

to market. Just as important, it readily

and so on, we welcome the low prices

technology to work has a lot to do with

shifts money, people and other

that result as today’s companies com-

incentives. An economy will produce

resources from producing yesterday’s

pete for market share. But the existence

technological change faster when the

goods and services to what con-

of airplanes, telephones, automobiles

costs of doing so go down or the bene-

sumers will buy today and tomorrow.

and our other amenities we owe to

fits go up. Several factors influence the

Capitalism’s ability to unleash innova-

another kind of rivalry that capitalism

speed of the process: the breadth and

tion and invention lies at the very

promotes. It’s the competition from the

depth of a society’s existing endow-

heart of the great legacy of the Ameri-

next generation of goods and services,

ment of technology, the introduction

can experience—economic progress.

made possible by the relentless

of inventions with wide-ranging uses,

Successive generations of trans-

impulse in human beings to make

portation show how new products

themselves better off by improving life

come along to compete with existing

for everyone else.

ones. Suppose bankers in New York

By its very nature, capitalism seeks

and San Francisco want to enter into a

progress. Understanding this fact

4 The list of patented inventions that didn’t
quite make it illustrates the point. There
wasn’t much of a market for the boomerang
bullet, eyeglasses for chickens, coffins with
escape hatches or fire escape suspenders.

T H E E C O N O M Y AT L I G H T S P E E D

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flat-screen displays and the Internet—

more slippery than glare ice, that

all of which already exist, at least in

virtually eliminate friction? Those

prototype. Entrepreneurs could use the

technologies, and many more, are

same technologies to produce the sports

already being readied for use in new

cybercade, Steve’s virtual office, the

generations of products. Researchers

Joneses’ home entertainment amenities

are working within the cells of living

and the learning experiences offered by

organisms. Biotechnology may lead to

the schools Jane and Ben attend.

treatments for diseases and the pro-

the time it takes for products to spread

The National Automated Highway

duction of synthetic organs, but it is

throughout society, and overall market

Systems Consortium, led by General

already making possible clothing that

size. In assessing the possibilities of

Motors Corp., is at work on a self-

kills germs, bugs that gobble up toxic

the future, it’s more useful to look at

driving automobile. The Global Posi-

waste, enzymes that soften blue jeans

these forces —the dynamics of how

tioning System already helps truckers,

and cholesterol-eating peanuts with a

technology soaks into society— than

taxi drivers and farmers. Satellite-

shelf life measured in years, not

statistics that say more about where

based navigational systems are an

months. (See Exhibit A in foldout: “25

we’ve been than where we’re going.

option on some 1997 car models.

Technologies for the Next 25 Years.”)

What’s already in place offers to

Scientists at New Mexico’s Sandia

America enters the 21st century

quicken economic progress.

National Laboratories already produce

steeped in a culture of invention and

Our inventory of technology is

micromachines with gears the width of

surfing a tsunami of technology. By

large and growing. Despite the

a human hair. The Human Genome

one estimate, more than half the store

rapid-fire introduction of new products

Project to map the location and

of human knowledge has been pro-

in recent decades, we still have a large,

sequence of 100,000 genes, expected

duced over the past 50 years. In the

relatively untapped stock of techno-

to be finished by 2003, should allow

United States, the number of scientists

logy in the pipeline. The Joneses’

future doctors to detect and treat

and engineers working in research and

lifestyle in 2020 suggests applications

diseases through DNA analysis.5

development has doubled since the

for dozens of modern-day break-

And the Joneses’ lifestyle only hints

early 1970s. More than half of U.S.

throughs. A “smart” bed, for example,

at what’s to come from our laboratories,

patents have been issued in the past 40

could churn out a daily medical report

think tanks and entrepreneurs. The

years. The number of new products

using magnetic resonance imaging, a

potential boggles the mind. Many of

put on the market annually has tripled

technology that helps doctors make

the most promising projects involve

since 1980, and with so much R & D

medical diagnoses by showing the

tinkering with the basic elements of life

occurring, companies are likely to

details of soft tissues the way X-rays

and matter. In molecular engineering,

keep offering innovative goods and

reveal bones. The SAVVIE system,

for example, scientists are creating

services at a furious pace.

including faithful, tireless Max, might

whole new materials, forged atom by

combine powerful microprocessors,

atom, with astounding properties.

5 Even the Joneses’ three-day weekends draw
on recent experience. The average workweek
fell from 36.9 hours in 1973 to 34.5 hours in
1990. An equal percentage decline over the
next 25 years would yield a 31.4-hour workweek in 2020.

artificial intelligence, voice recognition,

How about a fiber stronger than steel

speech synthesis, holography, virtual

yet more elastic than a spider’s web, or

reality, fiber optics, high-definition TV,

perhaps one-molecule-thick coatings,

7

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If you think self-driving cars and
preprogrammed destinations are
far-fetched, think again. Global Positioning
System (GPS) technology can already
track objects anywhere on Earth via
computerized receivers and satellites in
space. Right now, GPS technology is
being used in some rental cars to provide
security and to tell drivers the most
efficient route to their destinations.
Taxis and commercial fleets are being
dispatched and managed using GPS.

Today’s inventions are providing big spillovers. The parachute is a very useful product, especially when an airplane’s engines conk
out at 10,000 feet, but it hasn’t had the
same impact on the way we live as the
internal combustion engine, the telephone or the jet airplane. Every so
often, an invention comes along that
really rocks the world, largely because
it has far-reaching applications and
serves as a building block for further
invention. The wheel, the plow, the
printing press and the steam engine
are examples of technologies that generated significant spillovers. Had elec-

machines and automatic tellers to air

this year, will ramp up to 1.6 billion.6

tricity not been harnessed for use more

traffic

the

We may look back on the microproces-

than a century ago, the modern house-

dinosaurs of Jurassic Park. The micro-

sor as an invention more pivotal than

hold would have few of the conven-

processor is adding “smart” features to

the printing press. (See Exhibit C in

iences we take for granted. No televi-

many everyday products. Today’s cars,

foldout: “Technology Spillovers.”)

sions. No refrigerators. No phones.

for example, have more computing

In 1801, J. M. Jacquard devised a

control

systems

and

Simply put, some inventions carry

power than the lunar landing module

binary control system on punched

more weight than others. (See Exhibit

of the Apollo 11 mission that put

cards to program a loom to weave a

B in foldout: “Not All Inventions Are

Americans on the moon. And even

preset pattern. Thomas Edison’s light

Created Equal.”)

more applications are just over the

bulb

installing electric wiring in their

In our time, it’s the microprocessor

horizon, as time and imagination point

—the tiny “brain” of the personal

us to new ways to use microprocessors.

computer —that’s producing spillovers

Meanwhile, the computer chip is get-

and spawning waves of new and

ting even more powerful. At the start

improved products. These little elec-

of the 1990s, the fastest chips could

tronic marvels make hundreds of other

handle 94 million instructions per

modern creations possible —from fax

second. The next generation, due out

gave

people

a

reason

for

6 Predicting just how far microprocessor speed
could go by 2020 would be about as silly
as saying, “Where…the ENIAC is equipped
with 18,000 vacuum tubes and weighs 30
tons, computers in the future may have only
1,000 vacuum tubes and weigh only 1½
tons”—Popular Mechanics, March 1949.

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A computer at the Institute for Genomic Research in
Gaithersburg, Maryland, connected to a DNA sequencer
automatically produces an image of a section of DNA.
Identifying the genetic code of humans at the rate of about
10,000 genes per month with the help of supercomputers,
scientists expect that all the building blocks of life will soon
be completely mapped. Other researchers are at work
building a silicon computer chip with rows of DNA molecules
and microelectronic circuitry that will analyze DNA 100
times faster than current methods. The implications for
international human genetic research are phenomenal.

Today, the PC is part of our tech-

times faster by the end of this year.

nology inventory, contributing to new

Each invention makes the next one

waves of invention. It would be

easier because of the way spillovers

impossible, for example, to envision

kindle a fire that feeds on itself—one

the Internet, one of today’s wonder

technology fueling development of

technologies, without the computer.

another. If there is any alchemy in free

The Internet and the computer, in turn,

enterprise, this is it: technology

pave the way for the next wave of

spillovers.

advances—search engines to explore

New products are spreading

the World Wide Web, high-speed

faster. Although feasible in the late

modems, gadgets that access the Inter-

1800s, electric power didn’t become

net through the television set, the soft-

universal until the mid-20th century.

ware to design home pages and intelli-

The first automobiles arrived on Amer-

gent agents that automatically sift

ican roads in the late 1800s, but the

through the oceans of information

country still had more horses than cars

homes. Christopher Latham Sholes

available in cyberspace. The Internet

into the 1920s. The technology for tele-

invented the typewriter in 1867 to

may be particularly powerful in

vision came in the 1920s, but the

produce legible letters more quickly.

driving technological change because

invention didn’t reach America’s

Ben Logee Baird produced the first

it reduces the cost of new discoveries

living rooms in large numbers until the

working television in 1926. Ted Hoff

by putting the latest research online at

early 1950s. These examples illustrate

of Intel Corp. invented the micro-

the touch of a button.

a fact of technological life: the time

processor in 1971 as the indispensable

And the ripple effects from the PC

component of the hand-held calcu-

don’t stop with computer-related

between invention and diffusion can
be decades or more.

lator. None of these inventors envi-

industries. Computational biology, a

But as lightning-fast communica-

sioned the PC. Yet binary program-

branch of science that uses computers

tions spread information faster and

ming, electricity, the typewriter key-

to locate and code genes, illustrates

consumers grow more sophisticated,

board, the cathode-ray tube, the

how the PC’s increasing power puts

new products are emerging more

microprocessor and hundreds of other

technology and progress on an even

quickly than in the past. It took 55

inventions were available for the West

faster track. Biologists are already iden-

years to get the automobile to a quarter

Coast hobbyists and entrepreneurs

tifying six to 10 new proteins a week,

of the U.S. population. The telephone

who contrived the first crude personal

and with more powerful microproces-

required 35 years; the television, 26.

computers in the mid-1970s.

sors, the process is likely to be three

Now look at some recent innovations:

9

10

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E C O N O M Y AT L I G H T S P E E D

After vaporizing a sodium pellet with a
laser and forming an atomic beam from the
debris, researchers at Bell Labs use lasers
to slow the atoms’ movement and create a
thick “soup” of light particles, which cool
the atoms to a record 240 millionths of a
degree below absolute zero. The final step
in the process is to shoot a powerful beam
through the area to trap the atoms.

a quarter of U.S. households owned a
personal computer within 16 years of
its introduction. For the cellular telephone, the time shrank to 13 years.7
The Internet is coming into commer-

Markets are getting larger.

The dismantling of trade barriers can

cial use even faster than the PC or the

Larger markets increase the incentive to

open whole new markets to U.S. pro-

cell phone. (See Exhibit D in foldout:

introduce new technology. It’s simply

ducers. For many products yet to

“The Newer, the Faster.”)

a matter of payoff. Had Alexander

come, the market will be global, so

New products follow a pattern. At

Graham Bell lived on a small island

the rewards for successful innovation

first, the latest innovations are expen-

with a population of 10, he’d have

figure to be even greater.

sive and perhaps tricky to use, so their

had little to gain from inventing the

market consists of a handful of

telephone. Fortunately for Bell—and

wealthy gadget lovers. Over time, the

20th century denizens—he intro-

products become cheaper and more

duced his invention into a time with

consumer-friendly through mass pro-

millions

duction and improved design. What

spread out on a continental scale.8 In

was once a luxury becomes an every-

the 1990s, of course, many new prod-

day necessity. The companies that

ucts enter a market of hundreds of

make the products can then expand

millions of customers.

of

potential

customers,

rapidly, chalking up sales and adding

Population is only one way markets

new jobs. Can there be anything better

grow. Rising incomes add to the number

for society—new and better products

of people who can afford to splurge on

for consumers, increased sales for

the latest bells and whistles. Falling

companies, more jobs for workers and

transportation costs and quickening

more fuel for future progress?

information flows can enlarge markets.

7 Even the microwave oven and VCR illustrate
the speedup in diffusion with the introduction
of the microchip. The VCR was invented in
1952 and the microwave in 1953. When the
microchip was introduced in 1971, less than 1
percent of households had either. Riding the
cost-cutting wave of the microchip, however, a
quarter of American homes enjoyed both by
1986 —in just 15 years.
8 Said another way, Thomas R. Malthus had it
exactly backward when he predicted that
Earth’s population would outstrip its resources,
leading to ever-growing poverty. In a free enterprise system, growing population (market size)
prompts more innovation, which stimulates
the growth process. There is no guarantee of
avoiding Malthus’ dismal scenario in anything
other than a market-based system.

T H E E C O N O M Y AT L I G H T S P E E D

|

However useful for many purposes,
total output is a figment which would
not exist at all, were there no statisticians
to create it. —Joseph Schumpeter
Strict logic is a stern master,
and if one respected it, one would
never construct or use any production
Exhibit 1

index. —Arthur F. Burns

Don’t Count On It
GDP statisticians just “can’t get no respect.” As if their job isn’t hard already—

Estimates of Bias in the

figuring out how to tally into one grand number all those apples, oranges and

U.S. Consumer Price Index
AUTHOR(S)

POINT ESTIMATE

Advisory Comm. to Study the CPI (1996)

1.1

Michael Boskin (1995)

1.5

Congressional Budget Office (1994)

.5

Michael R. Darby (1995)

1.5

W. Erwin Diewert (1995)

1.5

Robert J. Gordon (1995)

1.7

Alan Greenspan (1995)

1.0

Zvi Griliches (1995)

1.0

Dale W. Jorgenson (1995)

1.0

Jim Klumpner (1996)

.4

Lebow, Roberts and Stockton (1994)

1.0

Ariel Pakes (1995)

.8

everything else we buy — new measurement problems arrive every day as markets give us more for our money.
Improvements in product quality and new goods create measurement problems
that are commonly acknowledged. But more difficulties stem from GDP’s failure
to value variety and customization. American consumers can enjoy the cuisine of
more than 40 countries today, as compared with just a handful in the 1970s. We
can choose from among twice as many automobile producers, which offer more
makes and options than ever. Microbreweries have brought us an extended array
of beers, with some outlets carrying nearly 400 kinds. We have more variety in
soft drinks, tennis shoes, magazines, radio stations, martial arts classes, coffee,
amusement parks, cereal, sport utility vehicles, toothbrushes and on and on. Variety and customization enrich our lives because they allow us to select characteristics we value highly, but to the statisticians every car is a white Chevrolet.

1.0

Then there are preventive goods and services. Antilock brakes and air bags help

Wynne and Sigalla (1994)

1.0

prevent collisions and injuries. Safety caps on pill bottles keep children from

Equally weighted average

1.1

ingesting poison. Fat-absorbing proteins allow overweight people to avoid

Shapiro and Wilcox (1996)

expensive diet programs. Statisticians can’t measure goods unseen: the accident

SOURCE: Moulton (1996).

Bias in CPI Inflation

that doesn’t happen. A vaccine might someday eliminate tooth decay. Instead of
fixing cavities, dentists might build houses or design Web sites, with no effect on
overall GDP. But, meanwhile, we would have the benefit of the holes that aren’t

140

120

Per capita GDP
(Thousands of 1987 dollars)

in people’s teeth. What aggregate statistic could show this gain?
2.2% growth

Statisticians are aware of the measurement quandary surrounding GDP and, in
an effort to improve the statistics, are likely to reduce the gap between revisions of

100

the inflation index from 11 years to four or five. Economists have recommended
changes that would lower our estimates of CPI inflation by an average of 1.1 per-

80

cent, thus crediting more real growth to the economy. That’s a huge revision—
indeed, a doubling of our estimated growth rate—considering the fact that GDP

60

40

1.1% growth

per capita grew at an average annual rate of just over 1 percent during the 1973–96
period. It means that per capita GDP could be one-third higher than we had
thought possible by 2020 and double what we had expected by 2055.

20

0
1973 1983 1993 2003 2013 2023 2033 2043 2053 2063

What a Difference
1.1% Can Make

But even with the changes, statisticians will miss a lot of what’s going on.

11

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E C O N O M Y AT L I G H T S P E E D

Exhibit 2

Man Does Not Live by GDP Alone
Far more than any other measure, GDP is used to gauge America’s economic progress.
Fact is, though, we take our progress in ways other than GDP. “The reduction of working hours is one of the most significant ‘products’ of economic evolution.”* Yet GDP
gives the economy no credit for gains in leisure. Although measures of productivity—

The Misunderstood
Economy

output per hour at work—credit time off, they generally miss leisure time taken at work.
(See Exhibit 4: “The Way We Work.”)
Both GDP and productivity statistics fail to capture other aspects of improvement in our

Understanding how free enterprise

lives, such as better working conditions. And they fall short of capturing the value of new

stimulates progress gives us good reason

and better products, increased variety and customization, and

for optimism about America’s future.

products that are preventive in nature, such as cures.

The system is working to perpetuate

(See Exhibit 1: “Don’t Count On It.”)

better
working
conditions

and even accelerate advances in our
living standards. The irony is that the
numbers don’t agree. Progress is showing up everywhere but in the statistics.9
The problem, in part, lies in the
tools we use. The national income
and product accounts, developed in
the 1940s, arrive at GDP by toting up
the value of goods and services the
economy produces. These accounts do

ECONOMIC RESOURCES

physical capital
people’s time

technology

12

more leisure
higher productivity

In short, the economy works to produce whatever we want,
not just GDP. (See Exhibit 3: “Maslow’s Hierarchy of Needs.”)

new goods
higher quality
greater variety
preventive
output

*Austrian economist Joseph Schumpeter.

a reasonably good job of measuring

more GDP

traditional output —tons of steel,
bushels of wheat, cases of toothpaste,
tables, chairs, haircuts. Add it all up,

decline of 99 percent. Meanwhile,

1981. But the VCR didn’t make it into

and you’ve got GDP.10

our measures of inflation show a 180

the consumer price index until 1987,

Much of what we get, however, isn’t

percent increase in the price of light

after its price had fallen to under $300.

actually what we buy. We don’t really

bulbs and fixtures.11 The result is an

The pocket calculator, invented in

want cars—we want transportation. We

overstatement of inflation and an

1971, harnesses more computing power

don’t really want telephones—we want

understatement of true growth.

than a $750,000 room-sized mainframe

to communicate. We don’t really want
light bulbs—we want light.

Such measurement problems occur
time and again whenever markets give

The distinction isn’t facetious. The

us more for our money. Improvements

everyday light bulb, for example, is a

in product quality, new goods, greater

readily countable object that can be

variety and customization, preventive

easily included in GDP: all we need to

goods—all can widen the gap between

know is how many are sold and at

true and measured GDP. (See Exhibit 1:

what price. The light it produces, how-

“Don’t Count On It.”)

ever, isn’t so tangible. Yale University’s

The measurement problems are par-

William Nordhaus looked at the price

ticularly acute when technology is

of light and concluded it has fallen

moving rapidly. Take, for example, new

from 40 cents per 1,000 lumen hours

goods. Today’s VCRs provide better ser-

in 1800 to a tenth of a cent today, a

vice than those that sold for $1,125 in

9 One notable exception is Wall Street, where a
bull market has pushed the Dow up over 250
percent since the start of the decade.
10 To arrive at “real” growth, a common proxy for
how well the economy’s doing, statisticians
adjust the GDP numbers to account for rising
prices. If the numbers overstate inflation,
growth will come out equally low, suggesting
that the economy is weaker than it really is.
11 By progressing from less to more expensive
lighting equipment—from candles to lamps
to light bulbs—without accounting for the
service each provides (lumens), the price of
light is recorded as rising, even though it in
fact has sharply declined.

T H E E C O N O M Y AT L I G H T S P E E D

|

Now more than ever, we depend on
computers to complete our daily activities.
In our service and information economy,
computer applications will grow exponentially and improve our lives in ways
we have yet to imagine and cannot easily
measure.

radar screen, the Internet is barely registering a blip.14 Take a moment to
contemplate the irony: just when the
economy is most successful—when it
produces the most worth for the least
cost—the gap between true and measured GDP growth is the greatest. The
economy can get the least credit when
it’s accomplishing the most. (See
Exhibit E in foldout: “The Language of
Revolution.”)
of the 1950s but didn’t show up in the

longer and require less maintenance,

consumer price statistics until 1978,

manufacture stereos that reproduce

after its price had fallen well below

truer sound, grow tomatoes that don’t

$100.12 The personal computer was

turn to mush when frozen, make clothes

ignored by the statistics until 1987,

that fit better and require less care,

when its cost to the average American

improve mammograms to detect tumors

had fallen from a lifetime of work to lit-

at an early stage and pluck free informa-

tle more than two weeks’ worth. When

tion from cyberspace. In each case,

cellular telephones came on the market

we’re getting more of what we want at

in 1984, consumers paid as much as

the same or lower prices, befuddling the

$3,500 for the convenience of on-the-go

well-intended number crunchers.

communication. Now the phone often

Statisticians keep track of cost—

comes free, an inducement to sign with

that’s all they have to count. The econ-

a cellular service provider.13 Cell

omy produces worth—that’s what

phones won’t have a place in the price

people want. These aren’t always the

index until 1998, when at least 30 per-

same concept, and they diverge as

cent of Americans will own one. The

technology enables the economy to

result, in each of these cases, is an over-

deliver more worth at less cost. If

estimation of inflation and an under-

medical science invented a 1-cent pill

statement of real growth and progress.

that cured all our ills, it would be

Statisticians wouldn’t be stymied if

worth a lot but cost virtually nothing.

these gains could be instantaneously

Sound ludicrous? Consider the Inter-

tallied in the numbers that track the

net. In trying to find a way to charge

economy. It simply cannot be done.

customers for accessing Web sites,

With rapid advances in technology, new

companies have decided our smallest

and better products are coming at a

unit of money—1 cent—is too much.

dizzying rate. We buy cars that last

A 1/10 -cent unit is needed. On GDP’s

But the problem is deeper — even
more fundamental. Our economy is
not simply mismeasured, it’s misunderstood.
The economy has never tried to produce GDP: it tries to produce happiness, or satisfaction. And there’s a lot
more to life than GDP. (See Exhibit 2:
“Man Does Not Live by GDP Alone.”)
In the information age, our economy
is providing benefits beyond those
easily captured by GDP. When making
a list of needs and wants, most people
start with food, clothing and shelter.
After that, they move on to safety and
security and leisure time, then perhaps
to some of the “fun” aspects of life,
such as entertainment, travel and cul12 The first pocket calculators cost more than
$600.
13 Competition has reduced the monthly cost of
cellular service, too. The average local monthly
bill went from nearly $100 in 1987 to under
$50 by 1995.
14 U.S. researchers, say, can travel in seconds
from Ukraine to the UK in cyberspace at virtually no cost, whereas alternative modes of
travel would cost thousands of dollars.

13

14

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E C O N O M Y AT L I G H T S P E E D

Global communications have
already been revolutionized by the fiber
optic cable, which transmits pulses of
light instead of electrical current. As
researchers expand the technology, market
forces will move new products and services
into our daily lives with greater speed.

tural enrichment. Beyond that, most of

much as possible. We’ve progressed

breaks. What are workers’ concerns in

us seek personal fulfillment, such as

from narrow productivity concerns to

the 1990s? Meaningful work, respect,

the satisfaction that comes from a

“have a nice day.” What working con-

empowerment, social activities, well-

worthwhile or enjoyable job. This list

ditions did Americans tolerate decades

ness programs and family benefits.

shouldn’t surprise us. It reflects the

ago for the sake of productivity? Foul

What’s more, there’s evidence that

influential work of Abraham Maslow

air, bad lighting, hazardous sub-

workers are using more of their on-the-

(1908–70), the American psychologist.

stances, long hours, inadequate sanita-

job time for socializing, running

Maslow’s pyramid, a staple of psychol-

tion, inflexible schedules, repetitive

errands, attending colleagues’ retire-

ogy, reveals a hierarchy of needs and

tasks, the risk of death. Few of today’s

ment parties, going outside to smoke,

wants buried deep in the human

workers face the on-the-job risks of

selling their kids’ Girl Scout cookies,

psyche. (See Exhibit 3: “Maslow’s Hier-

their grandparents. Modern work-

exercising in company facilities—a

archy of Needs.”) At the most basic

places are well-lit and air-conditioned.

little bit here, a little bit there. It all adds

level are the physiological needs. With

Workplace deaths and accidents are at

up: time-diary surveys find that the gap

those met, we move up to safety, social

all-time lows. Hours at work have fall-

between actual weekly work time and

needs, self-esteem and, at the pinnacle

en for decades. Many workers have

what’s reported in government statistics

of the pyramid, self-actualization.

flexible schedules, including regular

rose from one hour in 1965 to six hours

As Americans grow wealthier, our

today. But neither the GDP nor produc-

physiological needs are being increas-

tivity statistics reflect job time spent on

ingly met, and there’s a shift in wants
from basic products to ever more
intangible outputs. There are plenty of
examples—from personal physical fit-

selfactualization

self-esteem
social needs

ecotourism and early retirement. One

safety

Americans today are less willing to
bow to the deity of productivity and
devote ourselves to churning out as

4: “The Way We Work.”)
And what about work that’s fun?
enjoy. Yet the standard statistics are apt
to register economic regression if we

of the biggest yet most overlooked
ing conditions.

relaxation while at work.15 (See Exhibit

Most folks these days seek work they

ness gurus and Internet chat rooms to

examples is improvement in our work-

socialization, personal business or

physiological

Exhibit 3

Maslow’s Hierarchy
of Needs

15 Productivity statistics capture the gains in
leisure time away from work because they
measure output per hour at work. But GDP
makes no attempt to include the value of any
leisure, whether on or off the job.

Exhibit

B

TOP 10 INVENTIONS

Not All Inventions
Are Created Equal

AND DISCOVERIES
1 Electricity 1873

From chewing gum to electricity, all inventions are an effort to raise our living

2 Microprocessor 1971

standards. A few make it, most don’t, but some inventions are clearly more

3 Computer 1946

earthshaking than others. Perhaps the best way to judge an invention’s signifi-

4 DNA 1953

cance is by its extent of spillovers—connections to other goods and services that

5 Telephone 1876

it either makes possible or makes cheaper to produce. This box lists the top 10

6 Automobile 1886

inventions and discoveries of modern times—open, of course, to dispute. What

7 Internet 1991

shouldn’t be overlooked, however, is that four of the top 10 are relatively

8 Television 1926

recent—from the past 50 years.

9 Refrigeration 1913
10 Airplane 1903

Exhibit

C

Technology Spillovers

MICROPROCESSORS AT WORK
Navigate air traffic in our skies
Guide lasers used to cut metal, diamonds and corneas

The microprocessor. First it helped with such minor tasks

Read zip codes and sort mail

as addition. Now it’s helping us decipher the code of the

Manage weather-tracking systems that span the globe

human genome.

Create special effects in movies

Invented just 25 years ago, the microchip already has
enabled the invention of thousands of smart consumer
products. The answering machine, pocket calculator, caller

Scan prices of goods in checkout lines
Keep inventories and records
Track packages at carrier superhubs
Route phone calls worldwide

ID device, camcorder, CD player, personal computer, digital

Run copiers and fax machines in the workplace and home

camera, fax machine, microwave oven, organizer, pace-

Direct robots in automobile manufacturing plants

maker, pager, pocket translator, laser printer, remote con-

Reduce static and interference in cellular transmissions

trol, radar detector, synthesizer and VCR are just a few. The

Operate automatic teller machines

chip resides unseen in most products, its functions vital

Pilot sewing machines in custom-fit blue jeans factories

though increasingly taken for granted. In cellular phones,

Chart 3-D seismic surveys used in oil exploration

microchips translate voices to electronic signals and back,

Locate a child in distress

reduce interference, and store and execute programmed

Control temperature and time in microwave ovens

functions. In automobiles, they control carburetion, timing,

Design new drugs

transmission, suspension, emissions, brakes, air bags, seat
positions, navigational aids, engine diagnostics, keyless
locks, instruments and more. The sample of the microchip’s
varied uses at the right helps tell the story.

Fly planes
Mix paint
Translate languages
Coordinate traffic lights
Settle transactions between customers

But this is just the beginning. As the microchip gets

Monitor optical networks inside dams

smaller and faster, its applications are gaining momentum.

Improve the functioning of our cars

More and more, it’s not speed but our own imaginations
that limit how and where chips can be used.

Identify us by our fingerprints, iris, voice or scent
Teach parrots to talk
Connect people and information over the World Wide Web

Exhibit A

25 Technologies for the Next 25 Years

LASERS

TELECOMMUNICATIONS

Light amplification by stimulated emission of radiation.

The technology of communications at a distance. Talk to any-

Measure velocity and distance. Determine and record shape

body, anytime, anywhere.

(cavity). Survey and map. Level. Assess space. Cruise timber
(determine tree diameter and height). Clean surfaces. Cut metal,
wood, diamonds or corneas. Weld. Drill. Carve objects. Inlay.
Remove wrinkles in skin. Destroy tumors. Eradicate garbage.
Reduce vascular prominence. Prototype images. Heat treat.
Read bar codes, CDs. Measure vibration.

HOLOGRAPHY
The process of recording and displaying information in a threedimensional lexicon. Replicate 3-D images. Improve ID cards.

OPTICS

Secure authentication. Thwart counterfeiters. Record copious data.

The genesis and propagation of light and the effects that it
undergoes and produces. Magnify and focus. Control visual
aberrations. Transmit signals, voices, information. Probe endo-

VIRTUAL REALITY

scopically. Sense remotely. Illuminate. Coat materials. Detect

The interactive computer-aided simulation of the world humans

displacement. Gain vibration immunity (as in telescopes).

experience through their senses. Animate roller-coaster rides,

Control motion. Switch optically. Compute quickly. Stabilize

hang-gliding. Tour museums, the White House. Walk through

satellites and spacecraft.

orchestras. Explore caves, oceans, other planets. Perform
remote surgery, endoscopy, laparoscopy. Guide micromachines
inside the human body remotely. Educate dynamically. Train
pilots, drivers, surgeons, firefighters. Guide insects beneath
earthquake rubble. Practice golf swing.

PHOTONICS
The generation, manipulation, transport, detection and use of
light or energy whose quantum unit is the photon. Detect and
destroy airborne pollutants, irritants, allergens, bacteria, radon.

GENOMICS

Detect and destroy missiles, meteors. Transmit signals.

The study of genes and their sequencing on the DNA structure

Network wirelessly. Perform fiber optic endoscopy (using

of chromosomes in the nucleus of cells (the genome), as in the

lasers). Kill tumors using photosensitive drugs. Navigate vehi-

Human Genome Project, an effort to identify, sequence and

cles. Electrify with photovoltaic cells (solar energy). Digitize

map the entire human genome. Repair or reverse genetic

artwork,

defects, mutations. Create new vaccines. Improve diagnoses.

Recognize gestures. Create flat panel displays, LCDs. Measure

Engineer cancer-killing proteins or DNA bullets. Trigger hor-

features of surfaces at atomic scales.

cinema,

multimedia

video,

teleconferencing.

mone production. Strengthen immunity. Cure baldness, pimples. Assess environmental cell damage (from radiation).

COMPUTATIONAL BIOLOGY

Advance DNA fingerprinting. Speciate infectious organisms.

Computer-aided biological discovery. Match bits of DNA to

Clone. Slow aging.

known gene sequences. Search for defective genes, mutation.
Assist gene therapy. Discover new drugs.

Photos: Rice University Center for Nanoscale Science and Technology

ARTIFICIAL INTELLIGENCE
The computer modeling of human mental abilities, as in an
intelligent agent—software that enables a computer to react to
its environment, learn from experience and direct tasks useful
to its specific owner. Manage investments, control smart appliances, monitor household operations, shop for cars — all on
behalf of the principal customer. Track specific companies.
Search, retrieve and filter information across the Internet—

SMART PRODUCTS

news, weather, sports, products, schools, companies of direct

Products employing one or more microprocessors programmed

interest to the customer.

to perform specific useful functions. Smart consumer goods:
Refrigerators track household food inventory; beds and toilets

INTERNET
An interconnected network (web) of computers, each serving
information to whoever is connected. Locate information on any
subject, anytime. Send mail, shop, bank, invest. Buy tickets,
make reservations, study menus. Visit friends, club members,
coworkers. Peruse companies. Job hunt.

monitor health; chairs adjust for comfort; cards facilitate
exchange; locks facilitate keyless entry; skis bend and stiffen as
needed. Smart machines: Cars travel without drivers, collisions; sewing machines tailor to recorded personal patterns.
Smart materials: Parts warn of excessive stress, heat; clothing
reacts to temperature.

INTEGRATION TECHNOLOGY
Computer telephony integration (CTI), including, more broadly,
cable, wireless and satellite systems, radio and television broadcasting, traffic control and appliances in an expanded Internet.

THE MICROPROCESSOR

See who you’re talking to. Video conference. Control (block,

A one-chip computer.

identify, cull) incoming calls. Visit remotely with intelligent
agents. Monitor asthma via modem. Shop, bank, order movies,

COMPUTER

vote. Control equipment, send digitized images from afar. Meet

An electromechanical device

potential dates.

that has logic and memory and
can be programmed to perform
specific functions.

BIOTECHNOLOGY
Applied knowledge of the natural biological factors that affect
life. Engineer foods to eliminate undesirable characteristics and
add desirable ones. Engineer disease- and insect-resistant
plants. Increase food production. Clean up waste and pollutants. Soften blue jeans. Manufacture disinfectants, fungicides,
germicides, bactericides, biocides, herbicides and slimicides.
Make biodegradable packaging, preservatives, rust and scale
removers. Reduce oxidation. Reduce insect problems (fire ants,
killer bees). Create new dermal tissue, cartilage, heart valves,
blood, hair follicles. Grow human organs in animals. Engineer
new drugs, vaccines and pharmaceuticals. Propagate vegetation.
Create new life forms. Reverse environmental contamination.

NANOTECHNOLOGY
The precise and purposeful manipulation of matter at an atomic
level (1 billionth of a meter). Otherwise known as molecular engineering. Make superconductors. Create flawless diamonds, more
powerful and perfect lenses, biological sensors. Make thin films
(organic, metallic, diamond). Manufacture perfect bearings,
rotors. Achieve microscopic adhesion (paint, glue, DNA). Gain or
reduce elasticity. Make tiny machines the size of microbes to
break down toxic waste, kill pests, attack viral diseases.

RECOGNITION TECHNOLOGY
Identification of people or objects by their characteristic shape,
sound or smell. Shape recognition: Recognize faces, features, irises, emotions. Identify objects. Guide robotic arms. Improve quality control. Detect defects, forgeries. Digitize form for patterns,
templates. Sound recognition: Voiceprint and identify individuals. Gain keyless entry. Translate languages. Recognize material
stress (such as worn brake pads). Smell recognition: Identify individuals. Detect fire, decay, pollution, gas leaks, drugs, bogus perfumes. Analyze breath for illness. Sniff wounds for bacteria,
infection. Recognize and remove airborne odor, dust, pollen.

NOISE CANCELLATION TECHNOLOGY
Computer-aided noise negation through the process of inverse
wave generation. Reduce noise in airplanes, industrial machinery, household appliances (vacuum, lawn mower). Reduce
vibration in engine gears, motors, machines. Reduce road noise.
Eliminate static and disturbance in wireless voice and video
transmissions. Reduce background noise in speech recognition.
Treat tinnitus (persistent ringing in the ears).

MICROWAVE
The transmission, amplification and reception of a very short
electromagnetic wave (0.25 to 100 centimeters in wavelength).
Transmit voice, data, facsimile and video via satellite and wireless systems. Track weather via Doppler radar. Guide and land
aircraft. Cook, heat, dry, clean, sanitize.

WIRELESS
The remote transmission of analog and digital signals via the

GPS

wave spectrum. Facilitate satellite and cellular communica-

Global Positioning System. Orbiting satellites used to ascertain

tions: cordless and cell phones, pagers, wireless cable (Direct

the exact position (latitudinal and longitudinal coordinates) of

TV), wristwatch phones, wireless digital modems, cordless

an object anywhere on the Earth’s surface. Coordinate taxi pick-

appliances.

up and delivery. Till soil, bulldoze ground inch by inch.
Pinpoint cars, missing children, pets. Help the blind negotiate
unfamiliar areas. Plan travel routes.

BIONICS
The merging of biological, electronic and mechanical systems.

ROBOTICS

Develop implants to help the deaf hear, the blind see. Pump

The use of mechanical and electronic equipment to perform the

drugs to diabetics. Pace or defibrillate hearts. Restore neural

functions of humans. Weld, paint, handle materials, move pack-

sensation. Improve prostheses. Meld microchips and bugs,

ages and equipment. Assemble vehicles, computers. Fight fires.

robots and animals.

Decontaminate facilities. Navigate hazardous areas. Vacuum,
clean floors, windows. Farm (field robots using GPS). Cut grass.
Perform surgery. Explore the ocean. Mine, maintain aircraft.

MATERIALS SCIENCE
The study of how structural and electronic materials behave at
all levels (from quantum to fracture mechanics) so as to

MICROMACHINES

improve their performance and devise new materials. Create

The manufacture, at the micron scale, of gears, hinges, motors,

light, strong, noise-absorbing composites for car and aircraft

pumps and other mechanical structures. Often not visible to the

bodies, high-temperature alloys and ceramics for jet engines,

human eye. Probe the body and clean arteries, locate tumors,

biocompatible materials for surgical implants, fast (3-D) semi-

measure the strength of a single heart muscle cell. Sense strain.

conductors,

Mine intelligently. Make smaller, faster microchips.

high-temperature

ceramic

Manufacture materials by plasma spraying.

superconductors.

Exhibit

E

The Language of Revolution
“If your PC has enough MIPS and your modem
enough bits, then boot up, log on to your ISP and
browse cyberspace for the Web site using your
favorite meta-search engine. From the home
page, download version 2.1 software, move your
mouse to the main menu window and surf to the
Net chat line. When your E-mail icon pops up,
encrypt your response to avoid packet sniffers
and Web heads or other hacker geeks trying to
export viruses and crash your hard drive.”
Huh?
One test of whether times are revolutionary is
how fast language changes. And if we’re not moving fast, where are we getting all these new words?
Just look at how our vocabulary has grown in the
past two decades to describe the computer and the
Internet. Try finding these words, phrases or
acronyms in a 1970 dictionary. If they exist at all,
they’ll have a totally different meaning.
You won’t find Internet listed either.

Bit BOOT UP Browser BYTE Cache

CD-ROM Chat line CLIENT/SERVER CPU

CURSOR Cyberspace DISK DOS DOWNLOAD

Driver E-MAIL Encryption FLOPPY Geek

GIGABYTE GUI HACKER Hard drive HITS

Home page ICON IDE ISP LAN LAPTOP

Log on MEGAHERTZ MIPS MODEM

Monitor MOTHER BOARD Mouse ONLINE

Packet sniffers PC Pixel RAM ROM

SEARCH ENGINE SOFTWARE Spam

Surf the Net URL Version 2.1 VIRUS

Web heads WEB SITE Window

THE SPREAD OF PRODUCTS INTO AMERICAN HOUSEHOLDS
Percent ownership*
100

Airplane

Television
Radio

Telephone

90
Microwave
80

Electricity
VCR

Automobile

70

60

50

40

PC

30

Cell
phone

Internet

20

10

0
1

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

85

90

95

100

105

110

115

120

Years since product invented
*Percent ownership refers to the fraction of households that enjoy each product,
except for the airplane, automobile and cell phone. Airplane refers to the percentage of air miles traveled per capita relative to miles traveled in 1996; automobile
refers to the number of motor vehicles relative to persons age 16 and older; cell
phone refers to the number of cellular phones per registered passenger automobile.

Exhibit

D

The Newer, the Faster
As the economy evolves, it takes less and less time for new
products to spread into the population. It took 46 years for a
quarter of American homes to be wired for electricity. Getting
phones to a fourth of America took 35 years; cars, 55. More
recently, however, the PC required only 16 years, the cellular
phone 13 and the Internet seven. Even the microwave oven and
VCR illustrate the speedup in diffusion since the microchip’s
introduction in 1971. Though both products were invented in
the early 1950s, as late as 1971 fewer than 1 percent of households had either. Riding the cost-cutting wave of the microchip,
however, a quarter of American homes enjoyed both by 1986.

SOURCES: U.S. Bureau of the Census (1970 and various years);
Cellular Telecommunications Industry Association (1996);
The World Almanac and Book of Facts (1997).

SPREAD OF PRODUCTS TO
A QUARTER OF THE POPULATION
Year
invented
▼

Years
to
spread

Electricity

1873

46

Telephone

1876

35

Automobile

1886

55

Airplane

1903

64

Product

Radio

1906

22

Television

1926

26

VCR

1952

34

Microwave oven

1953

30

PC

1975

16

Cellular phone

1983

13

Internet

1991

7

T H E E C O N O M Y AT L I G H T S P E E D

|

With 25 dishes, Goonhilly Earth Station
complex in Cornwall, England, is the largest
operational satellite station on the planet.
The complex provides the next generation
of vehicle tracking and monitoring through
Global Positioning System technology. By
making use of worldwide satellite coverage,
the system can continually track objects
(including the family car) anywhere on
the planet.

quit a job we’re good at but don’t like in
order to take one that’s more enjoyable.

A Future of
Fast Growth

It just doesn’t make good sense.
We take our progress in ways other
than GDP.

happens in the economy as it moves
into the 21st century.
We are fast departing a time when

The very notion of economic

progress can be measured by GDP or

progress is an artifact of the modern,

any other simple tally of what the

The economy today reflects our

technology-rich era. Until the advent

economy produces. If we become fix-

wealthier society’s preferences for

of capitalism in the 18th century, the

ated on the numbers and fail to imag-

harder-to-measure consumption. As

world’s living standards changed

ine the possibilities, we may miss one

we grow richer still in the future, we

only slowly. The French farmer of the

of the greatest periods of economic

can expect society to spend more of its

17th century lived, worked and died

advancement in history. Worse yet, if

time, energy and income addressing

pretty much like the Roman farmer of

we judge 21st century progress by

needs that are further and further from

the 1st century B.C. The same cannot

20th century measures, we may infer

the physiological. Pity the poor statis-

be said for our world: living stan-

that our system is failing and in need

tician with the job of tracking our

dards rise from generation to genera-

of repair by government.

increasingly elusive economy.

tion. We are in the throes of one of

That is the bad news.

By their very nature, the foibles of

history’s great bursts of technology,

Free enterprise is America’s greatest

our statistics are hard to overcome.

put to use quickly and effectively by

welfare program. For more than two

Critics of our national accounts can

a vibrant market economy.

centuries, the system has worked to

offer only an educated guess at the

It would, of course, be good to have

make our lives better. Whatever we’ve

inaccuracies. Taken together, however,

statistics that capture all the nuances

wanted—new and improved products,

the glitches imply that the numbers

of the economy as it evolves to meet

more leisure, better jobs, easier lives—

that gauge our economy aren’t giving

our needs. That’s probably too much

it has provided in abundance.

us a fair reading of what’s going on.

to expect. Expense and complexity

The pessimists fret that our best days

Most important, the inaccuracies prob-

make a daunting task of tracking an

are behind us. They are wrong. We

ably are worse than they were a decade

American economy centered less and

stand poised on the brink of a new era,

or two ago, and they are likely to get

less on tangible output. Our measure-

one endowed with technology and

even worse as we move into the 21st

ment technology cannot keep pace

teeming with opportunities. The future

century and beyond. In short, our

with the rest of our technological

offers even faster economic progress.

progress is becoming increasingly hard

progress. Relying on our existing mea-

We can keep up with the Joneses.

to capture with our measurement tools.

sures, we’re going to miss a lot of what

That is the good news.

15

16

| THE

E C O N O M Y AT L I G H T S P E E D

Exhibit 4

The Way We Work
For most of us, work is a major part of life. And better working conditions

Deaths per 100,000 workers

have routinely been a product of progress, right along with more GDP. This

45

is evident not just from the steady decline in worker death rates but also

40

from a comparison of our work concerns today versus yesterday. In the

35

early 1900s, our work worries centered on safety, fatigue, long hours, exces-

30

sive heat, poor ventilation, high humidity, bad lighting, exposure, disease,
lack of adequate toilet facilities and rigid schedules. Today, we seek inter-

25

esting and fun jobs with meaningful work, nice offices, employee activities,

20

flexible hours, empowerment, wellness classes, communication, employee

15

counseling and the ability to telecommute.
We also appear to demand more personal time at work. Time-diary surveys
show that Americans today take up to six hours per week of leisure on the

10
5
0

job, as compared with only one hour in 1965.

’30 ’35 ’40 ’45 ’50 ’55 ’60 ’65 ’70 ’75 ’80 ’85 ’90 ’95

Decline in the
Worker Death Rate

What are some of the ways employees use their recorded work hours other
than to work?

SOURCE:

National Safety Council (1996).

Arrive late after dropping off the kids Leave early to pick
up the kids Go to parent–teacher conferences Visit the
d o c t o r o r d e n t i s t Ta l k o n t h e p h o n e t o f r i e n d s C h a t w i t h
coworkers Go outside to smoke Give blood Play solitaire

Average weekly hours
7

6

o n t h e c o m p u t e r B r o w s e t h e I n t e r n e t f o r p e r s o n a l s t u ff
Attend wellness classes Sell cookies for the kids Raise

5

funds for charities Visit with friends via the Internet Call
4

automated tellers Exercise (even in employers’ facilities)
C a l l t a l k r a d i o p r o g r a m s o r c o n t e s t s R e a d t h e p a p e r, a

3

book or a magazine Attend parties or showers Write personal correspondence Leave to run errands Make a grocery
l i s t P e r f o r m c l u b d u t i e s Ta k e l o n g b r e a k s P a y b i l l s N a p

A little bit here, a little bit there, we’re spending our day more the way
we’d like.
The point is not that American workers are cheating their companies. On
the contrary, it’s all a part of progress. We’re not automatons, enslaved to
productivity as if we were still in the fields or on an assembly line. One
way we take the gains of technological progress is to simply enjoy life in
an economy that, more and more, transcends measurement.

2

1

0
1965

1975

1985

Time Spent Not Working at Work
SOURCE:

Robinson and Bostrom (1994).

T H E E C O N O M Y AT L I G H T S P E E D

ACKNOWLEDGMENT
“The Economy at Light Speed: Technology
and Growth in the Information Age –And
Beyond” was written by W. Michael Cox and
Richard Alm. The essay is based on research conducted by Cox, vice president and economic advisor, Federal Reserve Bank of Dallas.

SELECTED REFERENCES
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Price Index, “Toward a More Accurate Measure of
the Cost of Living: Final Report to the Senate
Finance Committee,” December 4, 1996.
Berndt, Ernst R., Zvi Griliches and Neal Rappaport, “Econometric Estimates of Prices Indexes
for Personal Computers in the 1990s,” National
Bureau of Economic Research Working Paper
Series, no. 4549, November 1993.
Boskin, Michael J., prepared statement in
“Consumer Price Index: Hearings Before the Committee on Finance, United States Senate,” Senate
Hearing 104-69, U.S. Government Printing Office,
1995, 109 –15.
Burns, Arthur F., Production Trends in the
United States Since 1870 (New York: National
Bureau of Economic Research, 1934).
Cellular Telecommunications Industry Association, “Wireless Growth Sets New Annual
Records,” media release, September 19, 1996.
Congressional Budget Office, Is the Growth of
the CPI a Biased Measure of Changes in the Cost
of Living? (Washington, D.C.: Congressional Budget Office, October 1994).
Darby, Michael R., prepared statement in
“Consumer Price Index: Hearings Before the Committee on Finance, United States Senate,” Senate
Hearing 104-69, U.S. Government Printing Office,
1995, 173–76.
Diewert, W. Erwin, prepared statement in
“Consumer Price Index: Hearings Before the Committee on Finance, United States Senate,” Senate
Hearing 104-69, U.S. Government Printing Office,
1995, 115–18.
Famighetti, Robert, ed., The World Almanac
and Book of Facts, 1997 (Mahwah, N.J.: World
Almanac Books).
Foulkes, Fred K., Creating More Meaningful
Work (New York: American Management Association, 1969).

Gordon, Robert J., prepared statement in
“Consumer Price Index: Hearings Before the Committee on Finance, United States Senate,” Senate
Hearing 104-69, U.S. Government Printing Office,
1995, 122–26.
Greenspan, Alan, prepared statement in
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Committee on the Budget,” Serial no. 104-1, U.S.
Government Printing Office, 1995, 130–49.
Greenwood, Jeremy, and Mehmet Yorukoglu,
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Public Policy, forthcoming.
Griliches, Zvi, prepared statement in “Consumer Price Index: Hearings Before the Committee on Finance, United States Senate,” Senate
Hearing 104-69, U.S. Government Printing Office,
1995, 129–32.
Jorgenson, Dale W., statement in “Consumer
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104-69, U.S. Government Printing Office, 1995,
36–41.
Klumpner, Jim, “Fact and Fancy: CPI Biases
and the Federal Budget,” Business Economics 31
(April 1996): 22–9.
Lebow, David E., John M. Roberts and David J.
Stockton, “Monetary Policy and ‘the Price Level,’ ”
mimeo, Federal Reserve Board, 1994.
Moulton, Brent R., “Bias in the Consumer
Price Index: What Is the Evidence?” Journal of
Economic Perspectives 10 (Fall 1996): 159–77.
Nakamura, Leonard, “Is the U.S. Economy
Really Growing Too Slowly? Maybe We’re Measuring Growth Wrong,” Federal Reserve Bank of
Philadelphia Business Review, forthcoming; “Is
U.S. Economic Performance Really that Bad?” Federal Reserve Bank of Philadelphia Working Paper
no. 95-21/R, April 1996; “Measuring Inflation in a
High-Tech Age,” Federal Reserve Bank of Philadelphia Business Review, November/December 1995,
13–25.
National Safety Council, “Work, 1995” in
Accident Facts, 1996 ed. (Itasca, Ill., 1996).
Nordhaus, William D., “Do Real Output and
Real Wage Measures Capture Reality? The History of Light Suggests Not,” Yale Cowles Foundation Discussion Paper no. 1078, September 1994.
North, Peter, The Wall Chart of Science and
Invention (New York: Dorset Press, 1991).
Paepke, C. Owen, The Evolution of Progress
(New York: Random House, 1993).

|

Pakes, Ariel, statement in “Consumer Price
Index: Hearings Before the Committee on
Finance, United States Senate,” Senate Hearing
104-69, U.S. Government Printing Office, 1995,
44–8.
Price, C. W., Orval Simpson, Dale Wolf,
Charles Woodward, F. J. Moss, W. R. Basset and
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Overestimated Workweek? What Time Diary Measures Suggest,” Monthly Labor Review 117
(August 1994): 11–23.
Schumpeter, Joseph, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the
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Shapiro, Matthew D., and David W. Wilcox,
“Mismeasurement in the Consumer Price Index:
An Evaluation,” NBER Macroeconomics Annual
1996 (Cambridge, Mass.: MIT Press, 1996),
93–142.
Sherwood, Mark K., “Difficulties in the Measurement of Service Outputs,” Monthly Labor
Review 117 (March 1994): 11– 9.
Slifman, L., and C. Corrado, “Decomposition
of Productivity and Unit Costs,” Board of Governors of the Federal Reserve System, mimeo,
November 18, 1996.
W. E. Upjohn Institute for Employment
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U.S. Bureau of the Census, Statistical Abstract
of the United States, various years; Historical Statistics of the United States: Colonial Times to
1970, Part 1, 1975.
U.S. Department of Energy, Energy Information Administration, Housing Characteristics
(Washington, D.C.: Government Printing Office,
various years).
U.S. Department of Labor, Bureau of Labor
Statistics, Compensation and Working Conditions, June 1996; CPI Detailed Report: Data for
January 1994, March 1994.
Veblen, Thorstein, The Theory of the Leisure
Class: An Economic Study of Institutions (New
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Wynne, Mark A., and Fiona D. Sigalla, “The
Consumer Price Index,” Federal Reserve Bank of
Dallas Economic Review, Second Quarter 1994,
1–22.

17

18

| 1996

ANNUAL REPORT

Nineteen Ninety-Six:

Throughout 1996, the Federal Reserve

FINANCIAL SERVICES

Bank of Dallas built upon its long-term

In 1996, the Dallas Fed continued to

goals of economic growth, stability and

offer enhanced services for financial

leadership for the Eleventh District.

institutions in the Eleventh District.

As part of its continuing emphasis on

Particular emphasis was placed on

customer service, the Bank increased

ECONOMIC OVERVIEW

expanding electronic payments and

its customer base and volume in elec-

The Eleventh District posted its 10th

settlement options for financial insti-

tronic check imaging services and

successive year of growth in 1996.

tution customers in order to promote

implemented improvements to the

The regional economy again outper-

the development of a more efficient

processing of automated clearing-

formed the nation’s, although growth

and effective payments system.

house (ACH) and currency services.

occurred at a more modest pace than

In currency and cash services, the

To better serve financial institutions

in recent years. The construction

Bank provided additional flexibility

in the Eleventh District, the Bank

industry posted strong gains in the

for warehousing currency for the Fed-

began implementing a risk-based

commercial arena, which offset a

eral Reserve System and the Bureau of

approach to banking supervision and

modest decline in residential con-

Engraving and Printing (BEP). The

continued to be a leader in the devel-

struction. The banking sector contin-

completion of vault expansion early in

opment of automated tools to assist in

ued to do well, with credit widely

the year enabled the Dallas Fed to store

the supervisory process. The Bank’s

available throughout 1996. The oil

280 million notes for the BEP and ship

public policy and education efforts

and gas industry performed excep-

61 million notes to other Federal

focused on free market themes and

tionally well, helped by higher prices

Reserve districts. In currency process-

international economics and finance,

and technological improvements that

ing, the Dallas Fed expanded its auto-

particularly with respect to Mexico

increased productivity.

mated control and perpetual inventory

and the rest of Latin America.

High-tech industries continued to

tracking systems to each of its three

rebound. Weak activity in semicon-

Branch offices. As Texas phased out

ductors, however, held high-tech

paper food coupons in favor of an elec-

manufacturing growth to a rate of only

tronic debit card system, the Bank

2.5 percent, down from 7.3 percent

experienced a 92.9 percent decrease in

in 1995. A severe drought hurt the

the number of paper food coupons it

farming

sectors.

received, credited and destroyed. The

Although labor supply constraints

Dallas Fed consolidated commercial

kept economic growth in check,

book-entry tenders with the San Fran-

Texas’ unemployment rate in October

cisco District to increase efficiency in

was its lowest in 15 years.

the sale of Treasury bills, notes and

and

ranching

A strengthening Mexican economy

bonds to financial institutions.

helped generate increased export

During the year, the Bank expanded

demand for the District. In the first half

the provision of check imaging ser-

of 1996, one-third of all Texas exports

vices to its Houston and San Antonio

went to Mexico. For the year, Texas

Branch offices. Other electronic pay-

exports to Mexico grew 34 percent.

ments system improvements included

1996 ANNUAL REPORT

|

T h e Ye a r i n R e v i e w

software enhancement to allow elec-

trict, the Dallas Fed conducts examina-

tronic transmission of check images

tions for safety and soundness and for

and electronic check adjustments, and

compliance with consumer protection

the added capacity for customers to

laws and the Community Reinvest-

transmit deposit control documents

ment Act (CRA). To reduce the burden

electronically. The District’s volume of

BANKING SUPERVISION AND

associated with supervisory activities

automated clearinghouse transactions

DISCOUNT AND CREDIT

and to better serve our stakeholders,

rose 23 percent in 1996, reflecting the

Aggregate financial data reported to

the Dallas Fed began implementing a

continued success of the Dallas Fed’s

the Dallas Fed showed that banks in

risk-focused approach to bank supervi-

Alliance 98 partnership with auto-

the Eleventh District continued to

sion. This approach should make the

mated clearinghouse associations. The

thrive in 1996. Continued loan growth,

supervisory process more efficient and

volume of electronic transfers of funds

combined with stable net interest mar-

less intrusive, as more time is devoted

also increased by 15 percent. Conven-

gins, again produced a solid return on

to planning and preparing for an exam-

tional paper check volume increased

banking assets. Asset quality ratios

ination to tailor it to the risk profile

slightly more than 1 percent during

remained favorable, and capital levels

of individual institutions. Making

the year, despite the growth of elec-

continued at historic highs.

greater use of available technology will

Although consolidations and merg-

be a key factor in achieving this super-

transactions was centralized into one

ers reduced the number of banks in

visory objective. In that regard, the

national system in 1996, which

the District from 1,030 in 1995 to 986

Dallas Fed is the development site for

helped reduce the Fed’s automated

in 1996, five new bank charters were

the National Examination Database

support costs and lower the price of

granted. The trend of converting

and has been named the Federal

ACH services for customers.

tronic services. Processing of ACH

banks to branch offices continued,

Reserve Bank responsible for coordi-

Working to communicate informa-

with the number of branches increas-

nating software development for use in

tion to the financial community, the

ing from 3,008 to 3,184. The Dallas

the supervisory process.

Bank held focus groups throughout

Fed processed 284 applications—

The Dallas Fed’s discount window

the District and check operations

compared with 255 in 1995— for

made 263 loans in 1996, primarily

seminars in various cities. Presenta-

mergers and acquisitions, changes in

through its seasonal lending program.

tions to financial institutions and the

control and management, and other

Total credit extended decreased from

general business community stimu-

actions requiring regulatory approval.

$791 million in 1995 to $643 million

lated use of ACH origination and

Reflecting the solid condition of the

in 1996, in part because of the highly

direct payment services. The Dallas

industry and statutory changes length-

liquid position of many District insti-

Fed also conducted workshops on the

ening the time between examinations,

tutions.

Treasury’s new Electronic Funds Tax

the Dallas Fed conducted 308 exami-

The 48 state-chartered banks under

Payment System.

nations, 59 fewer than in 1995. Of the

the Dallas Fed’s supervision in 1996

308 examinations, 42 were reviews for

represented 4.9 percent of all insured

compliance with consumer and civil

commercial banks in the District and

rights laws. As the supervisor of state

held about 2.8 percent of insured com-

member banks, bank holding compa-

mercial bank assets. The 505 bank

nies and foreign agencies in the Dis-

holding companies under Dallas Fed

19

20

| 1996

ANNUAL REPORT

supervision last year controlled 599

rate systems, and featured former

production of several publications

insured commercial banks that held

Argentine Minister of the Economy

aimed at students and teachers. The

about 31 percent of all insured com-

Domingo Cavallo. Among the Bank’s

Federal Reserve System launched the

mercial bank assets in the District.

major research themes for 1996 were

Fed Challenge competition in 1996,

About 56 percent of the District’s com-

the impact of the peso devaluation on

and a five-member student team from

mercial bank assets were controlled by

the region and the effects of electronic

the Eleventh District won the national

holding companies headquartered in

technology on the U.S. money supply.

monetary policy competition. Other

other districts; the remainder were

The Bank also presented two art

activities included a monetary policy

controlled by independent banks in

exhibits, featuring works by Mexican

conference for the academic commu-

the District. Thirty-four foreign banks

artists Ruben Leyva and Diego Rivera.

nity and an intensive week-long

from 12 countries operated 16 state-

The Bank continued to provide pro-

licensed agencies and 27 representa-

grams and publications to communi-

tive offices.

cate broader public policy objectives

The Bank continued to provide

and key economic topics through its

information relating to the promotion

six regular economic publications and

of community development invest-

several special publications. Other ini-

ments, the Community Reinvestment

tiatives included a conference on the

Act and other consumer laws through

role of free enterprise in solving public

education, outreach and technical

policy problems, “Replanting the

assistance activities. Along with an

RESEARCH AND

Seeds of Free Enterprise: Grassroots

annual community development lend-

PUBLIC AFFAIRS

Solutions to Public Policy Problems”;

ing conference and the bimonthly

The Bank’s research and public out-

the conference “Supervision—Or Will

newsletter Banking & Community

reach efforts promoted free enterprise

It Be Super Revision?” sponsored by

Perspectives, the Bank produced A

and explored the intricacies of Ameri-

Houston Baptist University in coopera-

Banker’s Quick Reference Guide to

ca’s economic partnership with Mexico

tion with the Houston Branch, which

CRA, which is being used nationally

and other Latin American countries in

focused on shaping a partnership

by the Federal Reserve System; Texas

1996. The Bank’s Center for Latin

approach to lending; and “Job Creation

Colonias: A Thumbnail Sketch of the

American Economics cosponsored the

and Destruction in a Global Economy,”

Conditions, Challenges and Opportu-

international conference “Policy Rules

sponsored by the El Paso Branch.

nities, a special report on credit needs

program for teachers titled “Exploring
Monetary Policy.”

and Tequila Lessons” with the Univer-

The Bank continued its commit-

and community development initia-

sidad Torcuato Di Tella in Buenos

ment to economic education with

tives along the U.S.–Mexican border;

Aires. The conference focused on the

numerous programs for university

and Banking on Partnerships: A Digest

ripple effect of the Mexican peso crisis

and high school educators, sponsor-

of Community-Based Organizations in

and the sustainability of fixed exchange

ship of a student essay contest and the

Houston.

C O R P O R AT E E X E C U T I V E S

|

AND SENIOR MANAGEMENT

C O R P O R AT E E X E C U T I V E S
Standing (from left): Helen E. Holcomb,
First Vice President and COO, Federal Reserve
Bank of Dallas; Roger R. Hemminghaus
(Deputy Chairman), Chairman and CEO,
Ultramar Diamond Shamrock Corp.
Seated (from left): Robert D. McTeer, Jr.,
President and CEO, Federal Reserve Bank
of Dallas; Cece Smith (Chairman), General
Partner, Phillips-Smith Specialty Retail Group.

SENIOR MANAGEMENT
Standing (from left): Harvey Rosenblum, Senior
Vice President, Research and Statistics and
Director of Research; Sam C. Clay, Vice President
in Charge, El Paso Branch; J. Tyrone Gholson,
Senior Vice President, Cash, Protection, Securities
and Services; Larry J. Reck, Senior Vice
President, Check Collection and Data Services;
Robert D. Hankins, Senior Vice President, Banking Supervision, Discount and Credit, and Financial
Industry Studies; Millard E. Sweatt, Senior Vice
President, Operations Analysis, Purchasing and
Legal, General Counsel, Ethics Officer, Secretary to
the Board. Seated (from left): James L. Stull,
Senior Vice President in Charge, San Antonio
Branch; Robert D. McTeer, Jr., President and
CEO; Helen E. Holcomb, First Vice President and
COO; Robert Smith III, Senior Vice President
in Charge, Houston Branch.

21

22

| BOARDS

OF DIRECTORS

FEDERAL RESERVE BANK
OF DALLAS
Standing (from left): James A. Martin, Second
General Vice President, International Association of
Bridge, Structural & Ornamental Iron Workers;
Kirk A. McLaughlin, President and CEO, Security
Bank; J. B. Cooper, Jr., Farmer; Gayle M. Earls,
President and CEO, Texas Independent Bank;
Dudley K. Montgomery, President and CEO,
Security State Bank of Pecos. Seated (from left):
Milton Carroll, Chairman and CEO, Instrument
Products Inc.; Roger R. Hemminghaus (Deputy
Chairman), Chairman and CEO, Ultramar Diamond
Shamrock Corp.; Cece Smith (Chairman), General
Partner, Phillips-Smith Specialty Retail Group.
Not pictured: Robert C. McNair, Chairman and CEO,
Cogen Technologies Energy Group.

EL PASO BRANCH
Standing (from left): Hugo Bustamante, Jr.,
Owner and CEO, CarLube Inc., ProntoLube Inc.;
Patricia Z. Holland-Branch (Chairman),
President and CEO, PZH Contract Design Inc.;
Alvin T. Johnson (Chairman Pro Tem), President,
Management Assistance Corporation of America;
Lester L. Parker, President and COO,
Bank of the West.
Seated (from left): Beauregard Brite White,
Rancher, J. E. White, Jr. & Sons;
Veronica K. Callaghan, Vice President and
Principal, KASCO Ventures Inc. Not pictured:
Ben H. Haines, Jr., President and CEO,
First National Bank of Dona Ana County.

BOARDS OF DIRECTORS

HOUSTON BRANCH
Standing (from left): I. H. Kempner III
(Chairman), Chairman, Imperial Holly Corp.;
T. H. Dippel, Jr., Chairman and President,
Brenham Bancshares Inc.; J. Michael Solar,
Principal Attorney, Solar & Fernandes LLP.
Seated (from left): Peggy Pearce Caskey,
CEO, Laboratories for Genetic Services Inc.;
Edward O. Gaylord (Chairman Pro Tem),
Chairman, EOTT Energy Corp., and
General Partner, EOTT Energy Partners LP.
Not pictured: Judith B. Craven, President,
United Way of the Texas Gulf Coast;
Walter E. Johnson, President and CEO,
Southwest Bank of Texas.

SAN ANTONIO BRANCH
Standing (from left): Calvin R. Weinheimer,
President and COO, Kerrville Communications
Corp.; Erich Wendl, Vice President, Webro
Investment Corp.; H. B. Zachry, Jr. (Chairman
Pro Tem), Chairman and CEO, H. B. Zachry Co.;
Douglas G. Macdonald, President, South
Texas National Bank. Seated (from left):
Carol L. Thompson (Chairman), President,
The Thompson Group; Richard W. Evans, Jr.,
Chairman and CEO, Frost National Bank.
Not pictured: Juliet V. Garcia, President,
University of Texas at Brownsville.

|

23

24

| ADVISORY

COUNCILS AND OFFICERS

ADVISORY COUNCILS

OFFICERS
FEDERAL RESERVE BANK OF DALLAS

Financial
Institutions

Small Business and
Agriculture

Dallas

James A. Altick

Stephen K. Balas

Robert D. McTeer, Jr.

W. Arthur Tribble

President and CEO,
Central Bank,
Monroe, Louisiana

Owner and Pharmacist,
Eagle Lake Drugstore and
Home Health Care,
Owner, Balas Farming Co.,
Eagle Lake, Texas

President and CEO

Vice President

Helen E. Holcomb

Meredith N. Black

First Vice President
and COO

Assistant Vice President

T. Mike Field

J. Tyrone Gholson
Senior Vice President

Senior Economist and
Assistant Vice President

Evelyn LV. Watkins

Agriculture and Real Estate,
Lubbock, Texas

Robert D. Hankins

Terry B. Campbell

Mine K. Yücel

Gilbert D. Gaedcke

Senior Vice President

Assistant Vice President

Research Officer

Larry J. Reck

John V. Duca

El Paso

Senior Vice President

Senior Economist and
Assistant Vice President

Sam C. Clay

Robert G. Greer
Vice Chairman, Northern
Trust Bank of Texas, N.A.,
Houston, Texas

David A. Hartman
Chairman and CEO,
Hartland Bank, N.A., Austin,
Texas

Ron Humphreys

Chairman and CEO,
Gaedcke Equipment Co.,
Houston, Texas

Public Affairs Officer

Community Affairs Officer

Harvey Rosenblum

Lee Kirkpatrick

Paula Lambert

President and CEO,
Brownsville National Bank,
Brownsville, Texas

Founder and President,
Mozzarella Co.,
Dallas, Texas

Francis Lee

Robert W. Latimer

President and CEO,
Southwest Corporate
Federal Credit Union,
Dallas, Texas

President, Adobe
Corporate Capital LLC,
San Antonio, Texas

Don Powell

Gloria V. Brown

Chairman, President and
CEO, Boatmen’s First
National Bank of Amarillo,
Amarillo, Texas

Shareholder, Director
and President, Mitchell &
Jenkins P.C., Attorneys
and Counselors at Law,
Dallas, Texas

Jimmy Seay

J. Jay O’Brien

W. Michael Cox

Assistant Vice President

President and CEO,
City National Bank,
Mineral Wells, Texas

Cattleman, Amarillo, Texas

Vice President and
Economic Advisor

John R. Phillips

Sandra M. Smith
President and CEO,
Texas Federal Credit Union,
Dallas, Texas

John Spencer, Jr.
Senior Vice President, Frost
National Bank,
San Antonio, Texas

Harvey Zinn
President and CEO,
Southern National Bank,
Sugar Land, Texas

Robert G. Feil

Millard E. Sweatt

William C. Gruben

Senior Vice President,
General Counsel,
Ethics Officer and
Secretary to the Board

Senior Economist and
Assistant Vice President

Assistant Vice President

Bookman Peters

J. Eloise Guinn
Assistant Vice President

Johnny L. Johnson
Assistant Vice President

Earl Anderson
Vice President

Evan F. Koenig

Basil J. Asaro

Senior Economist and
Assistant Vice President

Vice President

C. LaVor Lym
Assistant Vice President

Vice President

James R. McCullin
Assistant Vice President

Vice President

Dean A. Pankonien

Assistant Vice President

Javier R. Jimenez
Assistant Vice President

Houston
Robert Smith III
Senior Vice President
in Charge

Vernon L. Bartee
Vice President

Richard J. Burda
Assistant Vice President

Robert W. Gilmer
Senior Economist and
Assistant Vice President

René G. Gonzales
Assistant Vice President

Certified Public
Accountant, Bryan, Texas

Billy J. Dusek

Tim Shell

Kermit S. Harmon, Jr.

ExecuTrain of Texas Inc.,
Dallas, Texas

Vice President

Sharon A. Sweeney

Joanna O. Kolson

Charles R. Tharp

Vice President

Assistant Vice President,
Associate General Counsel
and Associate Secretary

Partner/Manager, Tharp
Farms, Las Cruces,
New Mexico

Joel L. Koonce, Jr.

Gayle Teague

Vice President

Assistant Vice President

James L. Stull

Robert F. Langlinais

Michael N. Turner

Senior Vice President in
Charge

Vice President and
General Auditor

Assistant Vice President

Vice President

Larry C. Ripley
Assistant Vice President

Hayden D. Watson
Executive Vice President,
First Interstate
Bank of Texas, N.A.,
Houston, Texas

Senior Vice President
and Director of Research

Lyne H. Carter

Accounting Officer

Vice President in Charge

Robert D. Josserand

Joe D. Mitchell

Nancy Vickrey

Stephen P. A. Brown

Senior Vice President, First
National Bank of Artesia,
Artesia, New Mexico

President, AzTx Cattle Co.,
Hereford, Texas

KaSandra M.
Goulding

Federal Advisory
Council Member
Charles T. Doyle
Chairman, Texas
Independent Bancshares
Inc., Texas City, Texas

Kenneth V. McKee
Assistant Vice President

Luther E. Richards
Assistant Vice President

San Antonio

Stephen M. Welch
Rebecca W. Meinzer

Assistant Vice President

Vice President and
Administrative Officer

Marion E. White
Assistant Vice President

Genie D. Short
Vice President

Bob W. Williams

Taylor H. Barbee
Assistant Vice President

Richard A. Gutierrez
Assistant Vice President

D. Karen Salisbury
Operations Officer

Assistant Vice President

Larry M. Snell
Vice President

Emilie S. Worthy
Assistant Vice President

Effective January 1, 1997

SELECTED FINANCIAL INFORMATION
S TAT E M E N T O F C O N D I T I O N
(in millions)

ASSETS

DECEMBER 31, 1996

Gold certificates

$

Special drawing rights certificates

433

DECEMBER 31, 1995
$

405

399

376

49

49

1,284

333

14,118

12,381

1,197

1,414

Accrued interest receivable

127

126

Interdistrict settlement account

218

3,287

Bank premises and equipment, net

190

191

14
________

15
________

$ 18,029
________
________

$ 18,577
________
________

$ 15,340

$ 15,570

1,730

2,178

12

13

374

258

Statutory surplus transfer due U.S. Treasury

15

18

Accrued benefit cost

42

39

9
________

9
________

$ 17,522

$ 18,085

257

246

250
________

246
________

Coin
Items in process of collection
U.S. government and federal agency securities, net
Investments denominated in foreign currencies

Other assets
To t a l a s s e t s

LIABILITIES AND CAPITAL
Liabilities

Federal Reserve notes outstanding, net
Deposits:
Depository institutions
Other deposits
Deferred credit items

Other liabilities
To t a l l i a b i l i t i e s

________

________

C A P I TA L

Capital paid in
Surplus
To t a l c a p i t a l

$

507
________

$

To t a l l i a b i l i t i e s a n d c a p i t a l

$ 18,029

$ 18,577

These statements are prepared by Bank management. Copies of full
and final financial statements, complete with footnotes, are available
by contacting the Public Affairs Department at (214) 922-5254.

________
________

492
________

________
________

|

25

26

| SELECTED

FINANCIAL INFORMATION

S TAT E M E N T O F I N C O M E
(in millions)
FOR THE YEARS ENDED
DECEMBER 31, 1996

DECEMBER 31, 1995

Interest on U.S. government securities

$ 824

$ 804

Interest on foreign currencies

28
______

53
______

$
852
______

$ 857
______

$

$

INTEREST INCOME:

To t a l i n t e r e s t i n c o m e

O T H E R O P E R AT I N G I N C O M E :

Income from services
Reimbursable services to government agencies

9

(104)

67

1

—

1
______

______1

($______
42)

$ 126
______

Government securities gains, net

To t a l o t h e r o p e r a t i n g i n c o m e

49

7

Foreign currency gains (losses), net

Other income

53

O P E R AT I N G E X P E N S E S :

Salaries and other benefits

$

77

$

74

Occupancy expense

12

12

Equipment expense

10

9

2

2

26

23

55
______

53
______

$
182
______

$ 173
______

Income before cumulative effect of accounting change

$ 628

$ 810

Cumulative effect of change in accounting principle

—
______

(6)
______

Net income prior to distribution

$ 628
______
______

$ 804
______
______

$

$

Cost of unreimbursed Treasury services
Assessments by Board of Governors
Other expenses
To t a l o p e r a t i n g e x p e n s e s

DISTRIBUTION OF NET INCOME:

Dividends paid to member banks
Transferred to surplus

15

15

11

—

453

789

149
______

—
______

$ 628
______
______

$ 804
______
______

Payments to U.S. Treasury as interest
on Federal Reserve notes
Payments to U.S. Treasury as required by statute

These statements are prepared by Bank management. Copies of full
and final financial statements, complete with footnotes, are available
by contacting the Public Affairs Department at (214) 922-5254.

SELECTED FINANCIAL INFORMATION
S TAT E M E N T O F C H A N G E S I N C A P I TA L
F o r t h e Ye a r s E n d e d D e c e m b e r 3 1 , 1 9 9 6 ,
and December 31, 1995
(in millions)

T O TA L
C A P I TA L PA I D I N

SURPLUS

C A P I TA L

$246

$246

$492

—

—

—

—
________

—
________

—
________

$246

$246

$492

—

11

11

11

—

11

—
________

(7)
________

(7)
________

$257
________
________

$250
________
________

$507
________
________

B A L A N C E AT J A N U A RY 1 , 1 9 9 5

(4,936,624 shares)
Net income transferred to surplus
Net change in capital stock redeemed
(7,663 shares)
B A L A N C E AT D E C E M B E R 3 1 , 1 9 9 5

(4,928,961 shares)
Net income transferred to surplus
Net change in capital stock issued
(210,343 shares)
Statutory surplus transfer to the U.S. Treasury

B A L A N C E AT D E C E M B E R 3 1 , 1 9 9 6

(5,139,304 shares)

These statements are prepared by Bank management. Copies of full
and final financial statements, complete with footnotes, are available
by contacting the Public Affairs Department at (214) 922-5254.

|

27

28

| VOLUME

O F O P E R AT I O N S

NUMBER OF ITEMS HANDLED

DOLLAR AMOUNT

(Thousands)

(Millions)

1996

1995

1996

1995

1,425,077

1,328,681

22,064

20,022

836,223

931,406

138

153

1,091,459

1,071,311

648,485

614,465

Commercial—fine sorted

265,759

291,637

88,821

87,105

U.S. government checks

29,908

31,411

29,072

30,497

154,479

129,472

538,058

351,043

8,183

6,962

12,049,359

10,405,869

338

400

4,741,244

5,169,920

263

418

657

789

25

47

1,192

1,842

7,672

255,714

35

1,325

SERVICES TO DEPOSITORY
INSTITUTIONS

CASH SERVICES

Currency received from circulation
Coin received from circulation

CHECK PROCESSING

Commercial —processed

E L E C T R O N I C PAY M E N T S

Automated Clearing House items originated
Funds transfers processed
Book-entry security transfers

LOANS*

Advances made

SERVICES TO THE U.S. TREASURY
AND GOVERNMENT AGENCIES

Issues and reinvestments of Treasury securities
Food coupons destroyed

*Individual loans, not in thousands

T H E AE B
CO
ON
U OT MTYH A
E T DLAI G
LH
LA
T SS PFEEEDD

|

The Federal Reserve Bank of Dallas is
one of 12 regional Federal Reserve
Banks in the United States. Together
with the Board of Governors in
Washington, D.C., these organizations
form the Federal Reserve System and
function as the nation’s central bank.
The System’s basic purpose is to provide a flow of money and credit that
will foster orderly economic growth
and a stable dollar. In addition, Federal
Reserve Banks supervise banks and
bank holding companies and provide
certain financial services to the banking industry, the federal government
and the public.
Since 1914, the Federal Reserve
Bank of Dallas has served the financial
institutions in the Eleventh District.
The Eleventh District encompasses
350,000 square miles and comprises
the state of Texas, northern Louisiana
and southern New Mexico. The three
Branch offices of the Federal Reserve
Bank of Dallas are in El Paso, Houston
and San Antonio.

29

Federal Reserve Bank of Dallas
2200 North Pearl Street
Dallas, Texas 75201
(214) 922-6000
El Paso Branch
301 East Main Street
El Paso, Texas 79901
(915) 544-4730
Houston Branch
1701 San Jacinto Street
Houston, Texas 77002
(713) 659-4433
San Antonio Branch
126 East Nueva Street
San Antonio, Texas 78204
(210) 978-1200
www.dallasfed.org