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The New
Paradigm
Federal Reserve Bank of Dallas
1999 ANNUAL REPORT

Contents
From the President . . . . . . . . . . . . . . 1
The New Paradigm . . . . . . . . . . . . . . . 3
Year In Review . . . . . . . . . . . . . . . . .26
Senior Management . . . . . . . . . . . . 29
Boards of Directors . . . . . . . . . . . . . 30
Officers and Advisory Councils . . . . . 32
Financial Statements . . . . . . . . . . . . 34
Notes to Financial Statements . . . . . 39
Volume of Operations . . . . . . . . . . . 51
Cover: The delta-doped charged coupling device
for UV imaging and low-energy particle detection
was developed by the Micro Devices Laboratory of
the Jet Propulsion Laboratory, NASA. It is used for
astronomy and medical imaging applications.

O

ut on a
New-Paradigm
Limb
"Paradigm" is a pretty fancy word
for a country boy. My understanding of it is illustrated by the familiar
recipe for boiling a frog. You don't
boil a frog by dropping him into
boiling water. He'll jump out.
Instead, you drop him in cold
water and raise the heat. The frog
won't jump because he doesn't
realize his paradigm is shifting.
I believe our economy's paradigm has been shifting. But like the
frog, many of us haven't noticed
because the change has been gradual. Some attribute its improvement to good luck and temporary
factors, or "positive supply shocks"
in economists' jargon. We have
been lucky, and some of our good
fortune has been based on temporary factors. But we at the Dallas
Fed believe there's more to it than
that—a lot more.
We believe once-in-a-century
advances in technology are transforming our economy. The computer chip is doing for today's
knowledge economy what electricity did for our industrial economy a
century ago. Synergies in technology are driving an acceleration in
productivity growth that enables us
to grow faster with less inflation.
Economic progress is speeding up;
the speed limit is rising.

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

While many factors are important to the New Economy, our
essay focuses on technology. It
helps answer the skeptics who find
nothing new in the New Economy.
I'm on record saying the Internet
changes everything. I may exaggerate. "Things are different this time"
are infamous last words that put me
out on a limb. So be it. The greater
exaggeration is to say nothing has
changed, except, perhaps, some of
the old economy's parameters.

+
Technology is the main force
driving the New Economy, but not
the only one. Deregulation of key
industries is a factor. Increased
worldwide competition is another.
The collapse of communism and
hard-core socialism is part of the
mix, along with the fall of the Iron
Curtain in Europe and the protectionism curtain in Latin America
and elsewhere. Freer trade and
investment throughout the world
are factors. Efficient U.S. capital
markets and the unique venture
capital system serving high tech
are important. So is the switch
from budget deficits to surpluses.
The Fed has done its part by
reducing inflation. In the inflationary environment of the 1970s,
squeezed profits could be restored
by raising prices, with confidence
that competitors would go along.
Today's disinflationary environment shifts the burden to productivity-enhancing cost cutting as the
main route to higher profits.

We've been growing
faster than potential
and sustaining the
unsustainable for four
years and counting.
1999 was another good year for
new-paradigm optimists. Real GDP
grew over 4 percent. Payroll employment increased by 2.7 million
workers, or 2.1 percent. Unemployment fell to 4.1 percent. And core
inflation continued to decline, to 2
percent or below, depending on the
measure. The year ended with the
expansion poised to become America's longest.
Real GDP growth has averaged 4
percent for the past four years, with
declining inflation. This almost
doubles the 2 percent to 2.5 percent not long ago considered the
maximum noninflationary potential. But we've been growing faster
than potential and sustaining the

2
unsustainable for four years and
counting. Sounds odd, doesn’t it?
Our faster output growth is based
primarily on faster productivity
growth and secondarily on faster
labor force growth.
Productivity growth, or increases
in output per hour worked, is the
main source of rising living standards. It's nice to have more output
based on more workers and more
hours worked, but more output per
hour worked is what raises per
capita incomes and living standards. Productivity growth slowed
dramatically in the early 1970s, and
for two decades thereafter it grew
just over 1 percent a year. With the
number of hours worked also growing just over 1 percent, the potential
noninflationary growth rate—the
speed limit—was thought to top out
around 2.5 percent.
The decline in productivity
growth reversed in the 1990s, especially in the second half. Productivity growth now appears to be at
least 2.5 percent and rising. An
increase from 1 percent to 2.5 percent is an increase of 150 percent,
a huge jump with profound implications if sustained. Last year was
encouraging. Productivity rose over
3 percent for the year and over 5
percent in the second half.
In addition to faster productivity
growth, faster labor force growth
has also boosted the economy. This
was accomplished by drawing
down the pool of unemployed
labor, as evidenced by the decline

in the unemployment rate. I mentioned in last year's Annual Report
that it will be difficult to sustain
recent growth rates with this shrinking labor pool, and I made two
modest suggestions for alleviating
the shortage: remove the penalty
for Social Security recipients who
work, and increase the number of
visas for the skilled workers our
high-tech sector requires. The need
is even greater a year later, making
these reforms more urgent.
Given today's squeaky-tight labor
markets, neither of these proposals
should threaten existing workers.
The immigration proposal shouldn't
be a threat since our colleges are not
graduating enough native science and technology students to
meet demand. Filling key
slots with foreign
workers would likely
increase the demand
for U.S. workers by
allowing stalled projects
to go forward. In addition, Americans would
benefit if U.S. firms could
stay put rather than relocate
abroad to employ foreign
workers.

remained profitable and well capitalized. A good time—as they say—
was had by all.
On a personal note, I, too, had a
good year. Highlights included my
first visit to "Austin City Limits"
and to the Grand Ole Opry and the
Bluebird Cafe in Nashville. At the
Bluebird, the man who wrote one
of my favorite songs, "Bubba
Hyde," sang it for me. I made pilgrimages to Adam Smith's grave in
Scotland, Buddy Holly's in Lubbock
and Sam Houston's in Huntsville.
1999 will be a hard year to top.

+
The Federal Reserve Bank of
Dallas had a good year in 1999.
We—along with our banks—
squashed the Y2K bug. We provided more services with improved
efficiency. The District's economy
remained strong, and our banks

Robert D. McTeer, Jr.
President

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

3

The New
Paradigm
Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

The United States entered the 21st century with its
economy on a roll. GDP growth averaged more than
3 percent a year in the 1990s. The country created 17
million jobs, driving unemployment down to a 30year low of 4.1 percent. Recession receded into
memory—only eight months in the previous 17
1
years. As productivity surged, Wall Street gave the
economy rave reviews and the Dow Jones industrial
average quadrupled over the decade.
Through it all, one feature of the economic mix
remained somewhat surprising. Rather than rising,
inflation fell in the booming 1990s. Consumer prices
rose 5 percent per year at the start of the decade but
less than 2 percent a year from 1996 on. (See Exhibit
1 on page 4.)

4
Exhibit 1

The U.S. Economy:
Gaining Momentum in the ’90s
By virtually any measure—GDP growth, unemployment, national
wealth, inflation and more —the U.S. economy performed better
in the ’90s than it had in decades. Some say the good times
can’t continue. But a deluge of new technologies and industries
made possible by the microprocessor has only begun to reshape
the economy.

25

Growth in GDP per Worker

Percent

20
15
10
5
0

7

1970s

1980s

1990s

End-of-Decade Unemployment Rate

Percent

6
5
4
3
2
1
0

350

1970s

Percent

1980s

1990s

Change in Dow Jones Industrial Average

300
250
200
150
100
50
0

120

1970s

Percent

1980s

1990s

Increase in Consumer Prices

100
80
60
40
20
0

1970s

1980s

Times this good defy traditional economic analysis. For
at least the past five decades, conventional wisdom held
that a free market economy couldn’t long sustain strong
growth, a low jobless rate and stable prices. Economists
emphasized trade-offs—between unemployment and
inflation, between price stability and growth.
When the economy started to percolate, the thinking
went, surging demand would create supply bottlenecks
and rising wages would ignite inflationary pressures.
Indeed, economic orthodoxy fixated on a “natural rate” of
unemployment—somewhere between 5.5 percent and 6.5
percent—below which the economy couldn’t go without
escalating inflation. Once the inflationary genie was out of
the bottle, the remedy was to brake the economy, which
meant fewer new jobs and more layoffs. The dismal science reached another dismal judgment: good times can’t
last because prosperity sows the seeds of its own demise.
To avoid ruinous cycles of boom and bust, the best a
mature economy can do is plod along at a growth rate of
2.5 percent a year.
Traditional theories are at a loss to explain the 1990s.
They miss the mark because of sweeping changes in the
U.S. economy. Over the past two decades, a new economy
has emerged from a spurt of invention and innovation, led
by the microprocessor. These thumbnail-size devices serve
as the “brains” for computers and thousands of other products, some as cutting edge as Doppler radar, others as
mundane as a musical birthday card. The microprocessor’s ability to manipulate, store and move vast amounts of
information shifted the economy’s center of gravity, creating the era of smaller, faster, smarter, better, cheaper.
The microprocessor’s myriad spillovers magnify its
impact. The microchip ignited wave after wave of invention and innovation. New technologies and new products
burst forth, a modern-day alchemy spinning silicon into
gold. The microprocessor and its spillovers forged an Information Age infrastructure of ever more powerful and
affordable computers, increasingly complex software,
data-dense fiber-optic networks, cellular telephones, satellite communications, laser scanners and the ubiquitous
Internet.
What’s different about the New Economy? There’s an
unbridled dynamism, flowing from an entrepreneurial cap-

1990s
1999 ANNUAL REPORT Federal Reserve Bank of Dallas

5
Exhibit 2

Technology Spillovers:
Increasing Returns and
Decreasing Costs

Even when individual industries face decreasing returns to scale, the economy as a whole
may enjoy increasing returns when technology spillovers from one industry benefit others.
Technology spillovers are especially abundant with mother lode inventions, whose applications spread far and wide. Innovation in one company—though intended solely for internal
benefit— can spark innovation in others, triggering a powerful, economy-wide cascading effect
not unlike alchemy. Revolutionary technologies can take decades to spawn all their spillovers,
during which, for all practical purposes, aggregate returns to scale increase.

■ Texas Instruments was trying to reduce
the size of electronic circuitry when engineer Jack Kilby developed the integrated
circuit in 1958. The benefits of that innovation far exceeded what TI could internalize, opening a whole new science in which
electronic circuitry would shrink to sizes
once thought unachievable.

■ Intel was pursuing circuitry small
enough for a pocket calculator when Ted
Hoff developed the silicon-etching process
that ultimately led to the microprocessor.
A 1971 ad in Electronic News heralded the
“computer on a chip” and signaled the start
of the digital age.

■ In seeking to make
microprocessors ever
smaller, IBM developed the scanning
tunneling microscope. The benefits of
that research, however, went far beyond
what was envisioned. The microscope
enabled an entirely new industry—nanotechnology—that promises to deliver molecularly engineered materials that will
reshape our world.

Economist Joseph Schumpeter clearly
understood the economics of spillovers:

“Whenever…a given quantity of output
costs less to produce than…before, we
may be sure…that there has been innovation somewhere. It need not necessarily
have occurred in the industry under observation, which may be only applying, or
benefitting from, an innovation that has
occurred in another.”
—Business Cycles, Vol. 1

“We are just now in the down grade of a
wave of enterprise that created the electrical power plant, the electrical industry, the
electrified farm and the motorcar….The
mere utilization of the achievement of the
age of electricity…would suffice to provide
investment opportunities for quite a time
to come.”
—Capitalism, Socialism, and Democracy

“Most of us seem here to commit a mistake
in handling the concept of decreasing
returns. In its proper sense it applies only
to given production functions and generally stationary conditions.“
—Business Cycles, Vol. 2

italism. A novel idea and a little money can spark a billiondollar business almost overnight. Yesterday’s economy was
dominated by establishment capitalism, with high barriers
to entry that disadvantaged newcomers and new products.
Economic change occurred at a slower pace.
In the New Economy, knowledge is more important to
economic success than money or machinery. Modern tools
facilitate the application of brainpower, not muscle or
machine power, opening all sectors of the economy to productivity gains. The Industrial Age ran on physical plant
and equipment. Rapid productivity growth was the
province of manufacturing, a shrinking segment of the
economy for four decades.
Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

Scarcity, the first assumption of the old economy, isn’t
the dominant feature of the New Economy. Many of
today’s markets are awash with goods and services. Sellers
compete aggressively for buyers. They discount. They cut
costs. They expand markets through relentless promotion
and advertising.
Increasing returns to scale pervade the New Economy.
More of today’s companies and industries thrive on quantity discounts—the higher the demand, the lower the price.
Decreasing returns to scale dominated the old economy, so
producing more goods and services pushed prices up. (See
Exhibit 2.)

6

The Microprocessor Miracle

Roughly 1.3 million Americans work in the cell phone industry—making
the phones and their components, handling services and sales, and
doing other jobs. Without the chip, this industry and many others
wouldn’t exist.

The most far-reaching implication of the New Economy
centers on the trade-off between growth and inflation.
Now, unemployment can go lower and growth higher without igniting inflation. Policymakers working under yesterday’s mind-set had to be vigilant about growth and job creation, reacting quickly to slow the economy before prices
spiraled out of control.
The New Economy is a controversial concept, still being
shaped by debates over its import and implications. That’s
not surprising, because adjusting to changes in economic
fundamentals takes time. The United States has passed
through several economic eras. We began as an agricultural society. After the mid-19th century, the steam engine
and then electricity transformed the country into an industrial nation. Today, deep into the Information Age, old economic theories fail to explain new realities and policy signposts don’t mean what they once did.
The challenge lies in adjusting our thinking to the new
realities.

Until the 1990s, contemporary Americans considered
the 1960s the quintessential good times because the
United States enjoyed uninterrupted growth for almost
nine years.2 The 1960s, however, don’t provide the best
corollary for what’s happening in today’s economy. We
need to travel further back in time.
From 1895 to 1915, a great burst of inventiveness ushered in an era of rapid technological change and economic
growth. Americans saw the arrival of one marvel after
another—automobiles, airplanes, telephones, phonographs, radios, elevators, refrigeration and much more.
These new inventions barely registered as a blip in a GDP
dominated by farming, shopkeeping and small-scale production. In time, though, the industries that grew out of
them formed the economic backbone of the 20th century.
The advances of this long-ago era would have been
impossible without a technology that arrived just after the
Civil War: electricity. Thomas Edison, the greatest of American inventors, created the lightbulb in 1879 for the simple
task of illuminating a room. To build a market for his
invention, Edison harnessed electricity, building the
world’s first generating plant and distribution network in
New York City. As it spread through the economy, electricity recast the economic paradigm.
Edison, without intending anything more than turning
night into day, triggered a revolution. Without electricity,
there would be no spark for internal combustion engines,
no power for telephones, radios, refrigerators and air conditioners. Electricity provided an ever-ready energy source
for factories, with mass production driving down the cost of
making just about everything. Without it, we’d still rely on
muscles, steam and wind, rather than electric motors and
gasoline engines. We’d still be living in a world of horsedrawn carriages, candles, ice houses and cottage industries.
Like electricity, the microprocessor is an important
invention in its own right and one that shook the world as
it touched off a rapid-fire proliferation of spillovers. The
device traces its origins to Dallas, where in 1958 Jack Kilby
of Texas Instruments fashioned the first integrated circuit,
a bundle of transistors on a piece of silicon. Thus began the
grand theme of modern electronics—ever smaller, ever
more powerful. Thirteen years later, Ted Hoff of Intel
1999 ANNUAL REPORT Federal Reserve Bank of Dallas

7

a. Microgyro chip: navigation,

b. Flash chip: television, data

c. Pentium III chip: computing,

d. DLP chip: movie and video

orientation

conversion

speech recognition, audio streaming

projection, photo finishing

e. DSP chip: cellular telephony,

f. StrongARM chip: printing,

g. Camcorder chips: personal video

h. Hygrometer chip: measuring

controlled braking, network

scanning, portable computing

recording

moisture

i. Diode laser chip: environmental

j. Delta-doped CCD chip: medical

k. Digital speaker chip: audio

l. Active pixel sensor chip: X-ray

monitoring, medical diagnosis,

imaging, measuring solar wind,

conferencing, portable audio

imaging, bone density and body

communication

monitoring industrial waste

m. Biochip: genomics research,

n. Camera chip: traffic monitoring,

o. Ibutton chip: bar coding, delivery

p. Doppler radar chips: monitoring

genetic testing, drug discovery

video conferencing, security

tracking, asset tagging, temperature

weather, wind shear detection

evaluation

sensing

connection

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

scanning

8
Exhibit 3

Knowledge Is Power
Advances in the ability to process, store and send information
have thrust America headlong into the Information Age. In just
three decades, processing power, storage capacity and transmission speed (bandwidth) have multiplied by tens to hundreds of
thousands. With capabilities soaring and costs falling to just pennies, information is becoming ubiquitous and the power of knowledge plentiful.

a. Processing, Storing and Sending Information
● Microprocessor
speed (MHz)

’70

’80

’90

’99

.11

8

50

800

4

64

4,000

1,000,000

50

56

46,080

9,600,000

◆ DRAM storage
(kilobits)

▲ Bandwidth
(kilobits per second)
MHz, kbps

Kilobits

100,000,000,000

1,000,000
100,000

1,000,000,000

10,000

10,000,000

1,000
100,000
100
1,000
10

●●
●●
●●

0
’70

’75

’80

● ●

’85

● ●●● 10
●●

●

1
’90

’95

0
’00

b. The Price of Power and Speed
’70

’80

’90

’99

Cost of 1MHz

$7,600.82

$103.40 $25.47 $.17

Cost of 1megabit storage

$5,256.90

$614.40

$7.85 $.17

Cost of sending 1trillion bits $150,000.00 $129,166.67 $90.42 $.12

developed the silicon-etching process that produced the
first true microprocessors. Initial applications centered on
number crunching and rapid data entry. Handheld calculators arrived in 1972, bar code scanners in 1974 and the
personal computer in 1975.
Over the next decade or so, American industry applied
microprocessors to other tasks. Whole new products, progeny of the digital electronic revolution, burst onto the marketplace—cellular telephones, robotic factory hands, air
traffic control systems, global positioning satellites, laser
surgery tools, camcorders, palm-size personal organizers,
to name a few.

Microprocessors made existing products better, cheaper
and more efficient. Starting in the early 1980s, “smart”
features helped fine-tune televisions, cut energy use by
refrigerators, control cooking in microwave ovens, memorize program schedules in VCRs and generate diagnostic
reports for automobiles.
As microprocessors grew in power, computers could
handle larger, more complex tasks. The emerging science
of computational biology illustrates how computers can
spur progress in unexpected areas. New programs allow
researchers to quickly decipher genetic code, speeding up
development of new drugs and improved plants. Away
from the laboratory, new programs open a world of possibilities—from the monsters that inhabit video games to
computer-aided design for cars, clothing and houses. Using
desktops and laptops, Americans run small businesses,
publish newsletters and keep tabs on family finances.
A third round of spillovers emerged as computers began
to communicate with each other, moving data quickly and
inexpensively. Universities were the first to hook computers into networks, but it wasn’t long before everyday
Americans began to connect via electronic mail. The Internet entered the 1990s as an obscure communications network for educators and scientists. It ended the decade as
the library, shopping mall and playground of the masses.
The Internet is creating spillovers of its own, making existing industries more efficient and spawning entirely new
ones, including web page design and Internet service.
The microprocessor miracle, including its wave of
spillovers, wouldn’t have been as spectacular if computing
technology hadn’t improved at such a rapid clip. Technical
types chart the progress in terms of megahertz. For the
rest of us, it’s enough to know that processing power leapt
7,000-fold in three decades. Number-crunching tasks that
took a week in the early 1970s now require but a minute.
(See Exhibit 3a.)
Data storage capacity and transmission speeds surged
right along with the more powerful microprocessors. A single memory chip now holds 250,000 times as much data
as one from the early 1970s—the difference between one
page of text and 1,600 books. Transmission speeds
increased by a factor of nearly 200,000. Sending the 32volume Encyclopaedia Britannica on the Internet from New
1999 ANNUAL REPORT Federal Reserve Bank of Dallas

9
Exhibit 4

16 Stats on the New Economy

Everywhere around us, we can see an economic revolution under
way. How we work, live, learn, communicate, shop and invest, what
we consume, value and know—all reveal an economy vastly different from that just 30 years ago.

’70

’80

’90

’99

1 U.S. households with computers

0%

<1%

22%

53%

2 U.S. shipments of personal computers

0

490,000

9 million

43 million

3 Computer programmers, operators and scientists in the U.S.

284,271

1.1 million

2.0 million

2.5 million

4 Computer and information sciences degrees conferred in the U.S.

4,104

15,041

37,700

35,116

5 U.S. manufacturers of computers and related devices

1,408

2,564

3,894

4,212

related devices companies

$43 billion

$47 billion

$57 billion

$415 billion

7 U.S. computer-services establishments

n/a

26,370

78,788

211,323

8 Market value of publicly traded U.S. computer-services companies

$166 billion

$91 billion

$106 billion

$416 billion

9 Number of PC software programs

0

n/a

n/a

250,000

10 Sales of U.S. software companies

$1 billion

$4 billion

$63 billion

$141 billion

11 Market value of publicly traded U.S. software companies

$1 billion

$6 billion

$33 billion

$440 billion

12 U.S. households on the Internet

0%

0%

0%

38%

13 Worldwide Internet hosts

13

213

313,000

56 million

and services companies

$0

$1 billion

$5 billion

$138 billion

15 Worldwide e-commerce revenues

$0

$0

$0

$151 billion

16 Worldwide e-mail addresses

0

n/a

n/a

263 million

6 Market value of publicly traded U.S. computer and

14 Market value of publicly traded U.S. Internet equipment

York to San Francisco would have taken 97 minutes in
1970. Today’s trunk lines can move the equivalent of eight
full sets in just one second.
Great leaps of power, capacity and speed led to even
greater reductions in the cost of managing information.
(See Exhibit 3b.) Intel’s vintage-1970 chips sold for $7,600
per megahertz. Today’s Pentium III chip supplies its computing power for 17¢ per megahertz. The cost of storing
one megabit of information—enough for a 320-page
book—fell from $5,257 in 1975 to 17¢ in 1999. Sending
the Encyclopaedia Britannica coast to coast would have cost
$187 in 1970, largely because of slow data-transmission
Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

speeds and the expense of a long-distance telephone call.
Today, the entire Library of Congress could move across
the nation on fiber-optic networks for just $40.
As the new technology became better and cheaper,
American businesses and households embraced it. Only a
few thousand homes had a PC in 1980. Now, more than
half of U.S. families own computers, the newest of them
200 times more powerful than IBM’s first PC, introduced in
1981. Two-fifths of households are connected to the Internet, a mode of instant communication scarcely heard of at
the start of the 1990s. Americans bought $141 billion
worth of software in 1998. (See Exhibit 4.)

10
Exhibit 5

America’s Shifting Source of Growth
Data on GDP at the detailed industry level are not available.
Employment data, however, reveal a clear shift away from yesterday’s commodity-based economic growth and toward knowledge- and network-based expansion. More than 40 percent of
employment growth in the ’90s came from New Economy industries—double that of the 1970s.
Percent of total employment growth
45

40

35

30

25

20

15

10
1980
Network economy

1990

1997
Knowledge economy

The Information Age’s invention, innovation and enterprise forged the New Economy. Many of the nation’s highgrowth industries wouldn’t exist without the microprocessor. High technology now drives the economy. It accounted
for more than 40 percent of job growth in the 1990s—double the rate of the 1970s. (See Exhibit 5.)
At the end of the ’90s, high tech, telecommunications
and health care—the prime beneficiaries of the microprocessor revolution—made up more than half the market
capitalization of America’s 500 largest companies. Three
decades ago, high tech still hadn’t come out of the geeks’
garages, and manufacturing and energy accounted for
about half the market capitalization. (See Exhibit 6.) While
the Dow quadrupled, technology stocks jumped 13-fold in

Prototyping each part of a car once took weeks and cost $20,000 on
average. Using an advanced 3-D object printer, Ford has cut the time to
just hours and the cost to less than $20.

the 1990s, another sign of invention and innovation’s
growing importance in the economy.
The microprocessor arrived a generation ago, then
began revitalizing American industry in the early 1980s.
Few understood how much the world was changing until
the 1990s, when the Information Age achieved a kind of
critical mass. It takes time for an invention to spread
through the economy, for spillovers to emerge and for
new products to reach the marketplace. Now that it’s all
coming together, America has new reason to stop seeing
itself through a lens of downsizing, inequality and falling
living standards. In the 1990s, thanks largely to the microprocessor and its spillovers, America witnessed a resurgence of economic growth, new jobs and productivity.

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

11
Exhibit 6

The Shifting Values of American Business
Recognizing the new economic paradigm, the market value of America’s businesses has shifted dramatically over the past few decades.
In 1970, the manufacturing and energy sectors comprised more
than half the value of the top 500 businesses. Today, knowledge is

king, with high tech, telecommunications and health care comprising 53 percent. Only four of 1970’s top dozen companies make the
list today. Three of them—Microsoft, Cisco Systems and America
Online—didn’t even exist in 1970.

1970
Market Capitalization

1999
Market Capitalization

High Tech

Manufacturing
Telecommunications

High Tech

Manufacturing
Energy
Health Care

Finance

Other

Other

Health Care

The Defining Dozen
1.
2.
3.
4.
5.
6.

IBM
AT&T
General Motors
Standard Oil
Sears, Roebuck
Eastman Kodak

Telecommunications

Finance

Energy

7.
8.
9.
10.
11.
12.

The Defining Dozen
Texaco
General Electric
Xerox
Gulf
DuPont
Ford

The Cost Revolution
The payoffs from the microprocessor and its spillovers
are part of daily life for just about every American. Yet their
mere existence doesn’t fully explain the advent of the New
Economy, especially the unexpected coupling of lower
inflation and faster growth. Today’s technologies force us
to revise the rules, not only because they spur new industries but also because they embody a sweeping capacity to
lower the cost of producing goods and services.
Technology impacts prices in several ways. Direct costs
fall as Information Age tools make it cheaper to produce
goods and services. Other savings come through electronic
commerce, which encourages lower prices by expanding
markets and increasing competition. Most important, the
Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

1.
2.
3.
4.
5.
6.

Microsoft
7.
General Electric
8.
Cisco Systems
9.
Exxon Mobil
10.
Wal-Mart
11.
Lucent Technologies 12.

Intel
IBM
SBC Communications
AT&T
Citigroup
America Online

microprocessor and its spillovers transform the structure of
long-term average costs, not just for New Economy enterprises but for the nation as a whole.
Direct costs. Corporate America invests heavily in computers, shelling out hundreds of billions of dollars in the
1990s for PCs, servers, software and peripherals. The
investment pays off as computers boost the speed, accuracy and efficiency of just about everything businesses
do—from the design studio to the factory floor, from the
checkout counter to the accounting department. Information systems shorten supply chains, allowing timely delivery and automated reordering that slash inventory and
paperwork costs.

12
Exhibit 7

Precision Farming

Lumber Manufacturing

A Compendium
of Cost Cutting

With precision farming technology, remote
sensors on harvesters linked to GPS satellites enable growers to make straighter
rows, reduce swath overlap and crop compaction, operate in low-visibility conditions
(even at night) and increase field production with reduced operator time. And
whereas traditional soil testing occurs
every 21/2 acres, new digital mapping software computes crop yields every few feet,
so growers can zero in on specific areas
where yields are down. Soil-testing costs
fall from roughly $50 per sample using old
methods to under $8; yields are up; farmers can segregate their harvests into, say,
$15-a-bottle and $30-a-bottle grapes; and
trucks can be packed more accurately to
avoid fines for overloading and the inefficiencies of underfilling.

Weyerhaeuser’s state-of-the-art Green
Mountain sawmill uses scanners and computers to optimize the yield and value from
each log. The new technology has increased
yields by 30 percent over the past five
years, helping hold down lumber costs.

Telecommuting
The ability to work productively at home
has jumped, thanks to the spread of personal computers, e-mail, fax machines, cell
phones and the Internet. Roughly 30 million adults currently use the Internet at
home for business purposes. The proportion of workers with flexible schedules has
risen sharply, from just 15 percent in 1991
(when the World Wide Web was introduced) to nearly 30 percent today.
Roughly 20 million Americans now telecommute, working at least one day per
month from home during normal business
hours. Studies show that telecommuting
saves businesses roughly $10,000 annually for a worker earning $44,000— a
savings in lost work time and employee
retention costs, plus gains in worker productivity. By freeing us from the 8-to-5
company office so we can work when and
where we do it best, technology has cut
the cost of getting the job done nearly a
quarter.

Laparoscopic Surgery
Approximately 600,000 people in America had their gallbladders removed last
year, 95 percent of them with a new technique known as laparoscopic cholecystectomy. The procedure uses a smart surgical
tool known as a laparoscope—consisting of
a digital camera (advanced models containing three or more chips), fiber-optic
cables and a video monitor—and requires
only three or four 1/3-inch incisions.
Patients can resume normal activities in
just one week, compared with six weeks or
more with yesterday’s highly invasive surgery. The 85 percent reduction in lost work
time isn’t the only savings. The procedure
itself costs roughly 10 percent less in hospital and physician fees. Similar savings
apply to laparoscopic procedures involving
the stomach, appendix, esophagus, abdomen, colon and other organs.

Smart Structures
Monitoring and maintaining the soundness
of dams, bridges, buildings and tunnels can
be expensive. According to the Federal
Highway Administration, 42 percent of the
nation’s 578,000 highway bridges are seriously deteriorated. The current way to keep
tabs on the structures’ health is to periodically drill holes in each one and analyze its
core sample—a labor-intensive proposition.
But by equipping them with a fiber-optic
“nervous system,” data can be collected
continuously on structure strain, temperature, vibration, magnetic fields, cracks, and
road-salt corrosion and penetration. That’s
exactly what’s been done in Vermont,
where engineers have made the Waterbury
bridge the smartest in the world. What’s
more, embedded in a new dam spanning
Vermont’s Winooski River are four miles of
fiber-optic cables. Although there to monitor stresses and strains, the cables provided
an added bonus when spectrum readings
from one turbine showed an unpredicted
vibration, indicating efficiency had dropped
from 92 percent to 81 percent. Out-ofround gears were identified and replaced,
saving a significant amount of revenue.
Applied to the nation’s entire infrastructure,
the cost efficiencies from smart structures
promise to be enormous.

Lighting
Shed some light on the subject…for less.
Using increasingly sophisticated software
plus computer-aided design and testing,
researchers have been able to sharply
reduce lighting costs. Do the math. Illuminating a porch 10 hours a night, 365 nights
a year with a standard 100-watt, 750–
1,000 hour incandescent bulb costs about
$38 a year (using a rate of 10¢ per kilowatt-hour for electricity and bulb costs of
30¢ each). Today’s technology-improved,
screw-in 23-watt fluorescent bulb, however, gives off just as much light, lasts
10,000 hours and consumes only $8.40 in
electricity per year. Spread the $18 bulb
cost over the 23/4 years it will burn and the
total bill comes to just $15 annually. That’s
60 percent less than yesterday’s technology could deliver. Newer technologies and
advances in LED lighting provide even
greater cost reductions—energy savings of
up to 97 percent for bulbs that last
100,000 hours. The newest LED bulbs
burn substantially brighter yet can significantly lower the bill for operating traffic
lights, building exit signs and many other
lamps that must burn continuously.

Plane Design
In making the 777, Boeing pioneered a new
design process that uses a computer program called CATIA to digitize the entire aircraft. Eschewing the usual Mylar drawings,
Boeing developed a program that allows
engineers to “fly” through a computerized
prototype of the aircraft, iterating the
design in virtual space. The result is a big
reduction in cost. Rework time on the
plane’s design was reduced 60 percent to
90 percent over previous models, repair
time has been cut 80 percent and fuel efficiency is greater, not to mention that the
777’s noise signature is significantly lower.

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

13

Modern autos use upward of 120 microchips, not just to ensure
driver comfort and safety but to cut operating costs in numerous
ways—improving gas mileage, reducing tune-ups, providing engine
diagnostics, even cutting insurance costs by enabling companies to
track operators’ driving habits. With a package of chips costing no

Direct savings show up in every corner of the economy,
reducing pressure for companies to raise prices. Even better, the new technology is often powerful enough to allow
many companies to lower prices, a trend most evident in
the computer and electronics industries.3 (See Exhibit 7.)
In 1985, when Ford Motor Co. wanted data on how cars
withstood accidents, it spent $60,000 to slam a vehicle into
a barrier. Today, Ford’s supercomputers can simulate the
same collision in 15 minutes for $200. By 2001, the cost of
a frontal “crash” in cyberspace will be down to just $10.
In the airline business, the Final Approach Spacing Tool,
air traffic control software developed for NASA, makes
take-offs and landings more efficient. The system has
already cut two minutes off the average landing time at
Dallas/Fort Worth International Airport. When fully operational nationwide, it will save airlines almost $1 billion a
year in jet fuel.

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

more than $140, today’s Ford Taurus wields far more computing
power than the multimillion-dollar mainframes and lunar excursion
modules used in the 1968–72 Apollo space program. Vehicle functions whose costs were once prohibitive are now commonplace.

Microprocessors have replaced conventional hydraulic motion platforms in the Pan Am SimCom flight simulator for the Beechcraft King
Air B-200. Separate electronic systems recreate the visual, motion and
sound experiences critical to pilot training.

14
Exhibit 8

Barrels of Savings
Using 3-D seismic exploration technology, Amoco has cut the cost
of finding oil from nearly $10 per barrel in 1991 to under $1 today.
The 3-D seismic process reflects sonic waves off underground rock
formations, hydrocarbons and other minerals to produce a threedimensional image of the subsurface and better predict where oil
resides. Computer programs and modeling techniques acquire

data along multiple subsurface grids and correlate it with historical
production numbers to forecast the likelihood of oil and natural gas
reserves. Ten years ago, a detailed survey would average just
24,000 traces of seismic data, but today’s supercomputers yield
28 million—an increase of more than a thousandfold. Other technologies have helped cut drilling costs. Baker Hughes’ AutoTrak, for
example, is a smart downhole guidance system that continuously
keeps the drill bit within one meter of its preprogrammed course.
Geosteering has cut rig operating costs as much as 55 percent.
Price per barrel of oil equivalent
$12

$10

$8

$6

$4

$2

$0
’91

Moving the nation’s output of goods and services from producers to
consumers is an expensive undertaking, costing billions of dollars annually. Wal-Mart alone racked up 600 million route miles in 1999, making 1.2 million deliveries to its nearly 3,000 stores. How does modern
computer technology cut costs? Three years ago Wal-Mart purchased
mobile communication sets for its 4,300 tractors from HighwayMaster
Corp. of Richardson, Texas. The units include an on-board computer
featuring a global positioning system, a voice-activated cell phone and
a Cellemetry data transceiver, monitoring each truck’s location, load
weight, speed, gas consumption, odometer miles, idling time and more.
Trucks roll empty less often, fewer dispatchers are needed, gas mileage
is cut, trailer theft is down, idling time is reduced, records automatically
accrue and driver turnover falls. Total cost savings are up to 20 percent
in some cases. When applied to the 6 million to 8 million detachable
trailers in the United States, the savings could be huge.

’92

’93

’94

’95

’96

Wal-Mart, the nation’s largest retailer, cut up to 20 percent off the cost of operating a delivery truck by installing
computers, global positioning gear and cell phones in 4,300
vehicles. Supercomputers produce a thousandfold improvement in seismic data, allowing BP Amoco to find oil for
under $1 a barrel, down from nearly $10 a barrel in 1991.
(See Exhibit 8.) Processing an Internet transaction costs a
bank just a penny, compared with $1.14 with a pen, paper
and teller. (See Exhibit 9.)
Cutting direct costs means consumers pay lower prices.
At home, too, microprocessors are saving Americans
money. Computer chips are now tucked inside just about
every home appliance—from coffeemakers to garage door
openers. Since 1972, for example, chips have helped
reduce energy consumption by 36 percent for room air
conditioners, 42 percent for clothes washers, 50 percent
for dishwashers, 61 percent for freezers and 67 percent for
refrigerators. (See Exhibit 10.)

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

15
Exhibit 9

First in Line and Last in Cost
With the help of the Internet and PC software, today’s banks can
serve customers for a tiny fraction of the cost of yesterday’s
method—providing a teller at a branch. Banking transaction
costs on the Internet average a scant 1¢ each, compared with
$1.14 for face-to-face, pen and paper communication. Moreover, via the Internet or a dial-up connection, you’re always first
in line. None of this, of course, would be possible without the
information processing power of the chip.
Cost per transaction
$1.20

Exhibit 10

Is Your Refrigerator Running?
Yes, and a lot more efficiently than it did a quarter century ago.
Smart power systems—replete with integrated hardware/software, multichip modules, smart sensors and other features—
have reduced the cost of operating home appliances by onethird to two-thirds over the past 25 years. The biggest cut in
appliance operating costs is for refrigerators, which require only
a third the electricity they did in 1972, the energy equivalent of
a 75-watt bulb.
Index of kilowatt-hours
100

$1.14

90
Room air conditioner

$1.00

80
Clothes washer
70

$0.80

60
Dishwasher
50

$0.60

Freezer

$.55

40
Refrigerator

$0.40

30
20

$.29

$0.20

10
$0.00

Teller at
Telephone
branch bank

ATM

$.02

$.01

PC banking

Internet

Electronic commerce. The past quarter century’s inventions and innovations are changing the way Americans
buy and sell. Computers, high-speed modems, fiber-optic
cables and encryption software came together with the
Internet and electronic mail in the 1990s to create e-commerce. Americans are going online to schedule flights,
download music, buy books, invest in stocks, purchase
cars, find jobs and order groceries for home delivery.
The cyberspace marketplace is still in its infancy,
amounting to only $151 billion in 1999. By 2003, however,
it will rise to an estimated $1.7 trillion, then continue to
soar. Consumer purchases get most of the attention, but
four-fifths of e-commerce involves business-to-business
transactions.
Electronic commerce alters the economy’s cost structure by intensifying competition. The idea of rivalry among
sellers driving down prices has a long pedigree in economics, dating back at least as far as Adam Smith. And
there’s precedent for technology promoting competition.

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

0

’72

’74

’76

’78

’80

’82

’84

’86

’88

’90

’92

’94

The DSP chip, used in appliance motors, not only boosts the operating
efficiency of refrigerators and the energy-saving capabilities of washing
machines, it also makes for quieter air conditioning systems.

16

Forty-two percent of severely to profoundly hearing-impaired Americans
ages 18 to 44 are not in the labor force, compared with just 18 percent
of the general population. The hybrid microchip in Advanced Bionics’
cochlear implant can help deaf adults understand more than 90 percent
of words without lip-reading. Otic implants, bionic limbs, insulin pumps,
pacemakers and other smart medical devices contribute not only to
quality of life but also to our labor force and productivity at work.

Although still in its infancy, computational biology promises to be one
of the grandest spillovers from the microprocessor. Ever-faster computers have accelerated the process of gene sequencing, helping us with
everything from making safer burgers to decoding human DNA.

The canals and railroads of the 18th century and the air
transport and interstate highways of the 20th century
expanded customer bases and decreased the cost of bringing goods and services to market.
The ease of shopping nationally—or even globally—
online frees consumers from dependence on local merchants. We can buy wherever products are cheapest, then
get delivery overnight. Low-cost outlets win additional
business and thrive. High-cost sellers shrink and eventually
go out of business. At the same time, electronic commerce
reduces or even eliminates layers of retail and wholesale,
cutting the cost of marketing and distribution.
Today, e-commerce is a worldwide virtual marketplace,
open for business 24 hours, seven days a week. (See Exhibit
11.) Internet sites proliferated in the past decade as consumers discovered the convenience of shopping online. At a
click of the mouse, they can visit the sites of established
retailers—jcpenney.com, walmart.com and homedepot.com.
And they have access to hundreds of newcomers, including
bookseller amazon.com, lens merchant cheapcontacts.com
and sporting goods dealer fogdog.com.
Cyberspace business is a free-for-all, with entrepreneurs
striving to meet consumers’ needs by devising seemingly
endless schemes. Dell Computer lets buyers customize
computers online. Internet companies conduct traditional
auctions, such as the ones at ebay.com, and so-called
reverse auctions, where sellers bid for buyers.
Priceline.com and others play a version of “Let’s Make a
Deal,” with customers naming a price for airline tickets,
hotel rooms and other items. Sellers then decide whether
to accept. Mercata.com brings bulk discounts to the Internet by assembling groups of buyers who want the same
products. Ubarter.com matches companies’ surplus goods
and services in noncash transactions. New applications are
making shopping online even easier. Programs scour
cyberspace for the best prices—sometimes doing the comparison shopping while the buyer sleeps.
Declining long-run average costs. The economics of
the Industrial Age centered on the cost structure of yesterday’s major industries—manufacturing, mining, agriculture and construction. Their costs may fall as output
increases, but not for long. Well before demand is satisfied,
enterprises exhaust economies of scale and start bidding
1999 ANNUAL REPORT Federal Reserve Bank of Dallas

17
Exhibit 11

Better Shop Around
The emergence of the Internet and electronic commerce has redefined how today’s buyer
can better shop around. In at least 10 ways, outlined below, e-commerce has heightened
competitiveness in the markets that make up GDP and thereby flattened the economy’s
aggregate supply curve. The upshot: today’s shifts in aggregate demand don’t have the inflationary consequences they once did.

officemax.com
victoriassecret.com
peapod.com

E-tail. Avoid the company’s bricks-and-mortar store and go online to shop at its
web site. Office products, lingerie, groceries and more are all available for home
delivery at the click of a button.

dell.com
ssmills.com
amishreflections.com

Direct commerce. Be direct. Cut out the middleman and buy directly from the
producer. Computers, carpeting, furniture and a growing number of other products
are accessible factory-direct.

amazon.com
cheapcontacts.com
wine.com

Centralized marketplaces. Shop in a global marketplace that transcends
conventional boundaries. Buy the book, contact lenses, wine and other items your
local store doesn’t stock.

ebay.com
bid.com
sothebys.com
reverseauction.com
buyersedge.com
nextag.com

Auctions. Bid on whatever you’re looking for in a giant online trading community.
Shop by product category (for example, antiques) or by product model number
(Bose 501 speakers).
Reverse auctions. Watch multiple sellers bid prices down to win your business.
Make instant purchases at any time in a market where prices are continuously
falling.

mercata.com
accompany.com
letsbuyit.com

Group buying systems. Use group buying power to get quantity discounts. The more
people who purchase an item, the lower the price for all. Supply curves don’t just
flatten, they slope downward.

priceline.com
expedia.com
demandline.com

Buyer-driven systems. Set the maximum price you’re willing to pay for a product and
let sellers compete for your business. Autos, air travel, hotel rooms and more may be
cheaper than you think.

rusure.com
clickthebutton.com
dealtime.com

Shop bots. Take an intelligent agent shopping with you to look over your shoulder and
keep you from paying too much. Shop bots scan other sites and comparison shop so
you don’t have to.

mysimon.com
pricepulse.com
respond.com
freemarkets.com
verticalnet.com
ubarter.com

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

Personal shoppers. Use a personal cybershopper to shop for you at thousands of
online stores. Get what you want at a great price by letting technology work for you efficiently and anonymously.
Business-to-business commerce. Cut the cost of doing business by shopping
for your company’s equipment, parts, supplies and services in a competitive global
market.

18
Exhibit 12

Mind Your Ps and Qs
The concepts of price level (P) and aggregate quantity (Q) are highly
dubious. Nonetheless, statisticians persist in creating these two
measures, which are scrutinized out to their third digit. Perhaps the
biggest loss of usefulness from aggregating output is caused by
combining industries whose returns to scale are increasing with
those whose returns are decreasing. The effect of an increase in
demand on prices depends on whether raising output drives average costs up or down. Average costs usually rise in industries with
mostly variable production costs. The industries that dominated

yesterday’s material world (such as agriculture, mining, construction
and heavy manufacturing) and much of the less-skilled services
economy (household, personal, repair and cleaning services, for
example) are in this category. But for many other, often newer, sectors of the economy (such as computer hardware and software,
communications and pharmaceuticals), average costs often decline
as output expands because high fixed costs are spread over a large
number of buyers. To the extent that economic expansion comes in
industries of the latter type, GDP can grow without the inflationary
consequences often feared.

P

P

S

D1

S

D1

D2

D2

P2
P1

P1
P2

Q1

Q2

Q

up prices for scarce inputs. Production costs for additional
units rise, slowly at first but then more rapidly.
The bottom line: as Industrial Age companies expanded
operations, they had little choice but to raise prices to
cover higher costs. In an economy dominated by risingcost industries, additional demand can ignite inflation. It’s
this view of basic costs, accurate for an industrial economy,
that led analysts to conclude that rapid growth can
threaten price stability.
The Information Age gave birth to companies and
industries with a decidedly different cost structure. Their
output exhibits increasing returns to scale over a wide
range of products. Instead of rising with additional output,
average costs continue to slope downward. (See Exhibit
12.) Goods and services become cheaper to produce as
the size of the market increases. This gives companies a
powerful incentive for aggressive pricing, including quantity discounts.

Q1

Q2

Q

Information Age enterprises need more customers to
recoup their investment in new-product development.
Today, bigger is often better, which helps explain the surge
in mergers and acquisitions in the 1990s. Companies combine to capture the advantages that come from downward
sloping long-run average cost curves. (See Exhibit 13.)
What frees today’s technology from the old model of
increasing costs? It’s partly changes in the nature of what
we produce. Yesterday’s goods and services had a “rivalry”
in consumption, in which one person’s purchase barred
anyone else’s. In the New Economy, more companies
make products—such as information and entertainment—
that don’t disappear or even degrade with use. They can
satisfy many consumers at the same time, so additional
demand doesn’t lead to shortages.
Moreover, many New Economy businesses connect
people. It’s expensive to link one or two users in a network,
but it’s far less costly to add customers once the delivery

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

19
Exhibit 13

Bigger Is Better
Never has the number of corporate mergers and acquisitions
been higher. Advances in information management and communication have helped firms cut costs by consolidating output into
larger operations. Technology has made higher output the key to
lower prices across many industries.

U.S. Mergers and Acquisitions
Thousands
10

8

6

4

2

0
’72

’76

’80

’84

’88

’92

’96

system is big enough to serve a critical mass. This has
always been true for telephones, trucking routes, airlines,
television and electricity. Now it also applies to the Internet, media and telecommunications, all industries on the
economy’s leading edge.
Finally, the Information Age is largely a world of high
fixed and low marginal cost. Modern technology often
requires staggering startup costs, with tens or even hundreds of millions of dollars going to design products, recruit
workers, purchase equipment and establish a presence in
the marketplace. Once in production, however, delivering
additional goods or services is typically rather cheap.
Consider prescription drugs. It requires an average $350
million to bring a new pill to market. At that price, the cost
of producing the first dose is exorbitant. If it takes a penny
to produce each additional one, though, average production costs fall quickly—to $350 each at 1 million pills,
$3.51 at 100 million and 4¢ at 10 billion. (See Exhibit 14.)

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

For about $60, pet owners can have a biocompatible glass capsule
about the size of an uncooked grain of rice implanted between their
pet’s shoulder blades. A tiny memory chip inside the capsule acts as a
miniature transponder that relays information via low-frequency radio
signals. With the help of a special scanner (about $400), veterinarians,
animal shelters and the like can tap into a nationwide database of pet
owners, their addresses and phone numbers, plus the animals’ characteristics, pedigree, medical history and more. Not only does the system
make locating a lost pet much easier, it has made pet insurance affordable since conclusively identifying Fido is now possible.
Keeping track of livestock can mean big savings for ranchers. With
the help of electronic “hoof meters,” today’s high-tech dairy farmer can
check on the whereabouts of any one of his cows by double-clicking on
the animal’s face on a computer monitor. The history of each cow’s food
and medicine intake, weight, milk yield and even temperature is
instantly available from a comfortable remote location. What once took
a legion of workers now takes just one.

20
Exhibit 14

Average Cost of a Pill

Declining Long-Run Average Cost:
The Supply-Side Revolution

Cost
1 . . . . . $350,000,000.00
10 . . . . . . 35,000,000.01
100 . . . . . . 3,500,000.01
1,000 . . . . . . 350,000.01
10,000 . . . . . . 35,000.01
100,000 . . . . . . 3,500.01
1,000,000 . . . . . . 350.01
10,000,000 . . . . . . 35.01
100,000,000 . . . . . . 3.51
1,000,000,000 . . . . . . .36
10,000,000,000 . . . . .04
Quantity

It takes roughly $350 million to bring the average new
drug to market. That’s just for
the first pill. Making the second costs closer to a penny.
Clearly, nobody’s going to pay
$350 million for that first pill.
So to make medicine affordable, drug companies have to
spread the cost of developing
their products over years and
years of sales. The larger the
sales, the less each unit can
cost the consumer. Assuming
$350 million in development
costs and 1¢ marginal production cost thereafter, the average cost of making a pill would
fall from $350 million for producing just one to $350.01
each for making a million to 4¢

each for sales of 10 billion.
Prices fall in inverse proportion
to the size of the market. This
example illustrates that for
pharmaceuticals demand is
not the enemy of price but its
friend. The higher the demand,
the lower the price because,
after all, you can’t have quantity discounts without quantity.
Many products in today’s
economy are produced under
exactly this type of condition—
high fixed and low marginal
cost—and thus enjoy long-run
average cost curves that slope
downward. Software, CDs,
tapes, movies and even many
sophisticated electronic products are in this category.
Economies of scale also tend

to dominate industries that
deliver their goods or services
through a network—such as
telephone, television, radio,
facsimile, e-mail, Internet and
other communication or news
services; passenger and freight
air travel, railroad traffic, trucking, package delivery, pipelines

and other transportation services; and electricity, gas, water,
sewer, garbage and other public utilities.
Even parts of the wholesale and retail distribution network can enjoy substantial
economies of scale. The same
can apply to services that are
highly knowledge-intensive,
such as education, legal and
medical services, because
knowledge is nonrivalrous.
The cost of developing the
infrastructure to train just one
doctor is huge, but once it’s
set up, training the second
costs much less.
For all these industries and
others, the larger the market,
the less each unit can cost.

a. Wireless Rates in Dallas, March 1999

b. Internet Access Cost and Host Density, 1998

Average cost per minute

Access cost (Index, OECD=100)

$.60

200
Czech Republic

•

180

•Austria
•Belgium

$.50
160

Ireland

•

140
$.40

Luxembourg
France •
•
United Kingdom

•

•
Germany
•Hungary
••Portugal
100
Greece
Mexico •Japan
••Poland Korea
•
80 •Turkey
Spain
Italy••

120
$.30

$.20

60

•Switzerland
•Netherlands
OECD

•

•Denmark
•Sweden
•

New Zealand
•United States
•Australia

•Norway
•Iceland

•

Canada

•Finland

40
$.10
20
$0

0
60

100

250
500
Subscribed minutes

1,000

0

20

40
60
80
Internet hosts per 1,000 people

100

120

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

21
Many of the new technologies have the same cost structure. Software companies spend millions on programmers
who write line after line of computer code. Additional
copies are virtually costless if downloaded via the Internet.
In Dallas, the average cost of a minute of cell phone service falls from nearly 50¢ at 60 minutes per month to just a
dime for 1,000 minutes. (See Exhibit 14a.) Once they invest
in equipment, Internet service providers can add new subscribers for very little. The Scandinavian countries, the
United States, Canada and Australia show the deepest penetration of Internet households per 1,000 residents, and
they also have the lowest access fees. (See Exhibit 14b.)
The $9 trillion U.S. economy is sprawling and diverse,
with millions of companies. Some operate with increasing
costs, others with decreasing costs. Fast growth in the
New Economy creates more of the latter with each passing year. This alters the cost structure for the nation as a
whole, even though a large number of traditional industries continue to exist.
Spillovers add to the economy-wide savings. Computers,
software, high-speed data transmission and other new technologies lower the cost of doing business across wide swaths
of the economy. (See Exhibit 15 on page 22.) Even such oldline industries as steel, textiles and automobiles are taking
advantage of Information Age cost cutting. As a result, the
overall economy’s cost structure can slope downward, even
though many companies face decreasing returns to scale.

Want to make a movie? Shooting a one-hour flick on standard celluloid film requires three dozen 400-foot reels of 16-mm film at $150
each. Add processing and editing fees and the bill grows to nearly
$120,000, even before the cast and crew are paid. Or buy Canon’s
XL1 digital video camera for about $4,000, eliminate the processing fees and edit it
yourself on an Apple Cinema Display
powered by a PowerMac G4 ($6,500 for
the two), using Adobe Systems’ Premiere
software package (about $600). Cost the
microcinema way: about $11,000—90 percent less than with yesterday’s technology. And you
can make your next movie for the $10 cost of a twohour DV cassette.

Give Growth a Chance
The New Economy isn’t a mirage. The microprocessor
set off a revolution that spawned a new vitality and challenged old notions about the economy’s limits. And there’s
no end in sight. Industries and applications already in the
marketplace will take decades—in some cases, a century
or more—to fully mature. More spillovers from the microprocessor, and the innovations those technologies will
beget, are just over the horizon.
We think of the years straddling 1900 as wonderfully
inventive times, personified by Edison, who in bringing
electricity to the market launched a revolution. If anything,
our times teem with unmatched potential for technological
change. Edison gave the world a substitute for physical
power. Today’s entrepreneurs bring to the fore a more
Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

Cyrano Sciences has developed a handheld device with sensors that
detect food spoilage, volatile compounds, auto emissions, leaking
pipes, land mines and strep bacteria. Also in the works is an inexpensive “nose chip” that could be embedded in home appliances.

22
Exhibit 15

A Parade of Ps and Qs

Price vs. Quantity of Microprocessors, 1985 – 96

Associating higher quantity with lower prices certainly isn’t the norm
in current economic thought. Yet it can and does happen in many
industries. Cell phone and long-distance service, air travel, electricity, computer manufacturing and TV set production are but a few
examples.

PC Sales and Prices, 1977– 99

Price index, 1996 = 1

Quality-adjusted price index

140

10,000
’85
●

120

’77

●
●
1,000 ●
●
●●

100

●●
’82 ●
● ’87

’86
●

80

●

60

●
●●
●●

100

●’88

● ●

●

’92

●

●

●

40

’90 ●

20

0

●

’99
●

●’94

’96
●
1,000 1,500 2,000 2,500 3,000 3,500 4,000

500

●

●
●
’92

0

●

’97

10

●

1
0

10

20

30

40

50

Unit sales (millions)

Quantity (millions)

Cost vs. Quantity of Wireless Calls, 1988 – 99

Cost vs. Quantity of Television Sets, 1970 – 97

Average bill (1999 dollars)

1999 dollars
$1,600

$160

’70
$1,400 ●

’88
●

$140

●’90
● ’92
●
●

$100
$80

●

$1,200

●

$120

●
●●

●
●
’76

$800

$60

●

●
●
’82

$1,000
’94
●

’73
●
●
●

’84
●
●
● ●
’97● ●
●●
●
●
●
’91●
●
●

$600

●

●’96

’98
●

●

$40

$400

●
’99

’94
●

$200

$20

$0

$0
0

10

20

30

40

50

60

70

10

80

14

18

22

26

Sales (millions)

Subscribers (millions)

Cost vs. Quantity of a Long-Distance Call, 1970 – 98

Annual Miles Flown and Cost per Mile, 1930 – 97

1999 dollars

1999 dollars
$.90

$12
$10

’70●
●
●●
●
’74
●
●●
’82
’78●● ●
●●●●

$8
$6
$4

●

●’86

$2

●

’94
●● ● ●
● ●●
’90

● ’30
$.80 ●
●
$.70 ●
● ’36
$.60 ●
●
●
$.50 ●
●
●’44
$.40 ●●
●
●
●
●
●
●●
●● ’66
●
●
●●
$.30
●●
●●●
●
●
$.20
●●● ●
’98

$.10

●●
●●
●●● ●
●
● ●
’78
●●●● ● ● ● ●’97
’85

$0

$0
0

20

40

60

80

Long-distance calls (billions)

100

120

0

100,000

200,000

300,000

400,000

500,000

Miles flown (millions)

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

23
versatile, far-reaching asset—brainpower. Our inventory of
science and technology—the raw material of new products
and processes—exceeds anything seen before.
Global positioning satellites, artificial intelligence and
virtual reality are only now emerging as sources of new
goods and services. Biotechnology, too, is still in its infancy.
Armed with the tools of computational biology, scientists
will soon complete the Human Genome Project, an effort
to identify our entire genetic code. The research could
make possible treatments for a host of conditions—from
baldness to Alzheimer’s disease. Nanotechnology, the
emerging science of molding matter at the molecular level,
promises materials that conduct electric pulses with only
minute resistance and machines the size of microbes to
attack viral diseases.
Science gives us new technologies, but entrepreneurs
forge new products and organize new industries. From
Thomas Edison to Bill Gates, the great architects of enterprise stand as symbols of the legions who turn technology
into profits. Capitalism’s competition is a race, with the
prize going to those who harness technology to deliver
newer, better and cheaper products. The new paradigm
rises out of a powerful mix—a dynamic market economy
percolating with technology.
The New Economy manifests America’s future, but
making the most of it requires new thinking. We can no
longer operate under the old assumptions about how fast
the economy can grow, how low unemployment can go
and when policymakers should apply the brakes to ward
off inflation. Judging from the 1990s, the upper limit for
noninflationary growth may be a full point or more higher
than most economists thought at the start of the decade.
Faster growth and low inflation do go together, not just
in the short run but in the long term as well. In fact, we’ve
arrived at lower inflation not despite faster growth but
because of it. The New Economy needs to expand to capture the benefits of declining long-run average costs. We
shouldn’t underestimate the microprocessor technology’s
ability to make us more productive. If industries and workers continue to leap in efficiency, pressure to raise prices
won’t be as great.
By itself, growth is no longer an automatic trigger for
inflation. We cannot assume that strong GDP or vigorous
Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

By allowing us to replicate the power of the human brain and put it
wherever we want, the microchip launched a new economic paradigm
that is transforming virtually every aspect of the world around us. Applications for the chip’s “canned brainpower” are limited only by our imagination.

demand makes a spike in prices inevitable. As we advance
into the New Economy, the best course is to keep the
emphasis on direct measures of the price level. After all,
the best place to look for inflation is in price statistics, not
in readings of economic activity levels.
High inflation is undeniably a curse. Rapidly rising
prices rob consumers of their hard work and savings.
Uncertainty about future costs is unsettling for both individuals and companies. Most important, too-high inflation
always leads to a day of reckoning, when the economy
must be throttled back to restore stable prices. The worse
the inflation, the tighter the screws must be turned.
It’s right to be vigilant about inflation. Even so, we cannot ignore the changes sweeping the nation and world.
The new economic paradigm has brought us the best of all
worlds—innovative products, new jobs, high profits, soaring stocks. And low inflation.
It’s wise to be wary of inflation—but also to give growth
a chance.
—W. Michael Cox and Richard Alm

24
Notes
1

The economy hasn’t always been so stable. From 1853 to 1953, the
country endured recession 40 percent of the time. Since 1982, the
economy has been in a slump just under 4 percent of the time.
2

At 106 months, the 1960s expansion was then the longest in U.S. history. The current expansion, which began in March 1991, eclipsed that
record in February 2000.
3

For a thorough examination of pricing, see “Time Well Spent: The
Declining Real Cost of Living in America,” the Dallas Fed’s 1997 annual
report essay.

DeVol, Ross C., America’s High-Tech Economy: Growth, Development
and Risks for Metropolitan Areas (Santa Monica, Calif.: Milken Institute,
July 13, 1999).
Malone, Michael S., The Microprocessor: A Biography (New York:
Springer-Verlag New York, 1995).
Organization for Economic Cooperation and Development, OECD Science, Technology and Industry Scoreboard 1999: Benchmarking Knowledge-Based Economies (Paris, 1999).
Riordan, Michael, and Lillian Hodeson, Crystal Fire: The Birth of the
Information Age (New York: W. W. Norton, 1997).

Acknowledgments
“The New Paradigm” was written by W. Michael Cox and Richard Alm.
The essay is based on research conducted by Cox, senior vice president
and chief economist, Federal Reserve Bank of Dallas. Sonja Kelly,
Meredith Walker, Tom Siems and Charlene Howell provided research
assistance.

Selected References

Romer, Paul M., “Increasing Returns and Long-Run Growth,” Journal of
Political Economy, October 1986, pp. 1002–37.
Schumpeter, Joseph A., Capitalism, Socialism, and Democracy (New
York: Harper & Brothers, 1950); Business Cycles, Vols. 1 and 2 (New
York: McGraw-Hill, 1939).

Aghion, Phillippe, and Peter Howitt, Endogenous Growth Theory (Cambridge: MIT Press, 1998).

U.S. Department of Commerce, Secretariat on Electronic Commerce,
The Emerging Digital Economy, April 1998; The Emerging Digital Economy II, June 1999.

Carmel, Erran, Jeffrey A. Eisenach and Thomas M. Lenard, The Digital
Economy Fact Book (Washington, D.C.: Progress & Freedom Foundation, 1999).

——— , Bureau of Economic Analysis, Survey of Current Business, “Price
Indexes for Selected Semiconductors, 1974–96,” February 1998.

EXHIBIT NOTES AND
DATA SOURCES

Cost of 1 megahertz: 1971, Byte Magazine,

1980, 1990 and 1998, Employment and

www.byte.com. 1979 and 1989, Rhodes

Earnings, Bureau of Labor Statistics, various

University, “25 Years of Microprocessor History,”

years. Latest available data are for 1998.

Page 4, The U.S. Economy: Gaining

www.cs.ru.ac.za. 2000, Electronic Buyers’ News

Computer and information sciences degrees:

Momentum in the ’90s

Online, www.ebnews.com.

1971, 1980 and 1990, Statistical Abstract

GDP per worker: Bureau of Economic Analysis,

Cost of 1 megabit of storage: 1975, 1980

of the United States, 1993. 1996, Digest of

Bureau of the Census.

and 1990, “Price Indexes for Selected Semicon-

Education Statistics, U.S. Department of

Dow Jones industrial average: FAME Data-

ductors, 1974–96,” Bureau of Economic

Education. Latest available data are for 1996.

base.

Analysis. 1999, Electronic Buyers’ News Online.

Manufacturers of computers and related

Unemployment rate and consumer prices:

Average price of 64-Mb DRAM chips as of

devices: County Business Patterns, various

Bureau of Labor Statistics.

Dec. 8, 1999.

years. Latest available data are for 1997.

Page 8, Knowledge Is Power Costs are in 1999

Page 9, 16 Stats on the New Economy

dollars. Data for speed and capacity are based

Households with computers: 1980, Statistical

on the most advanced technology available.

Abstract of the United States, 1990, Bureau of

Data for cost are based on the least expensive

the Census. 1990, The World Almanac and

technology. Chart scale is logarithmic.

Book of Facts, 1998 (Mahwah, N.J.: World

Microprocessor speed: 1971, 1979 and 1989,

Almanac Books, 1997). 1999 data are a

Intel Corp. 2000, Chip Geek, www.ugeek.com.

Forrester Research Inc. estimate published in

DRAM storage: 1973, 1979 and 1988,

The Digital Economy Fact Book.

Hitachi, www.hitachi.co.jp. 2000, Samsung

Shipments of personal computers: The Wall

Magazine, December 1998,

Street Journal Almanac 1998 (New York:

www.samsung.com/magazine/tech.html.

Ballantine, 1997). 1999 data are based on a

Bandwidth speed: “Is There a Moore’s Law for

24 percent increase over 1998 figure.

Bandwidth?” IEEE Communications Magazine,

Computer programmers, operators and

October 1999. Data are for 1970, 1980, 1992

scientists in the United States: 1970, 1980

and 1999.

Census of the Population, Bureau of the Census.

Market value of publicly traded U.S.
computer and related devices companies:
Compustat. Market values are in 1998 dollars;
latest available data are for 1998.
Computer-services establishments:
County Business Patterns, various years. Latest
available data are for 1997.
Market value of publicly traded U.S.
computer-services companies: Compustat.
Market values are in 1998 dollars; latest
available data are for 1998.
Number of PC software programs: Number
of files in CNET’s shareware.com software library
as of Dec. 31, 1999, www.shareware.com.
Sales of U.S. software companies: 1970

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

25
and 1980, Compustat. 1990 and 1998, The

Page 14, Barrels of Savings: “The Role of

PC sales and prices: Bureau of Labor

Business Software Alliance, Forecasting a

3D Seismic in a World Class Turnaround,” paper

Statistics; The Wall Street Journal Almanac

Robust Future: An Economic Study of the U.S.

presented by William K. Aylor, Jr. at Society

1998. 1999 sales are estimated. Chart scale

Software Industry, June 1999. Data for 1980

of Exploration Geophysicists convention,

is logarithmic.

and 1998 are annual receipts. Sales are in

November 1997.

Cost vs. quantity of wireless calls: Cellular

1998 dollars; latest available data are for 1998.
Market value of publicly traded U.S.
software companies: Compustat. Market
values are in 1998 dollars; latest available data

Page 15, First in Line and Last in Cost:
The Digital Economy Fact Book. Data are for
1996 and are in 1999 dollars.

Telecommunications Industry Association,
www.wow-com.com.
Cost vs. quantity of TV sets: 1978–88,
Sears, Roebuck and Co. catalogs. 1992–97,

are for 1998.

Page 15, Is Your Refrigerator Running?:

J.C. Penney Company Inc. catalogs. Remaining

Households on the Internet: The Digital

Association of Home Appliance Manufacturers,

years are estimates based on linear extrapola-

Economy Fact Book.

www.aham.org.

tion from the two real values surrounding these

Worldwide Internet hosts: “Hobbes’ Internet

Clothes washer and dishwasher: Energy use

estimates.

Timeline,” info.isoc.org. A host is a domain

is in kilowatt-hours per cycle.

Cost vs. quantity of a long-distance call:

name that has an IP address record associated

Refrigerator: Energy use is for an automatic

1970–87, Statistical Abstract of the United

with it.

defrost, top mount freezer and is in kilowatt-

States, various years. 1988–97, Statistics of

Market value of publicly traded U.S.

hours per year.

Communications Common Carriers, Federal

Internet equipment and services companies:

Freezer: Energy use is for an upright, automatic

Communications Commission. Data for 1982

Compustat. Market values are in 1998 dollars;

defrost and is in kilowatt-hours per year.

and 1983 are estimates based on linear

latest available data are for 1998.

Room air conditioner: Energy use is based on

extrapolation from the two real values

Worldwide e-commerce revenues: Dataquest

750 hours of operation and is in kilowatt-hours

surrounding these estimates. Data are for a

Inc. and Forrester Research Inc. Revenues are in

per year.

five-minute call from New York to Los Angeles.

1998 dollars.
Worldwide e-mail addresses:
eMarketer, www.emarketer.com.

Page 19, Bigger Is Better: Statistical Abstract
of the United States, various years. Covers transactions of $5 million or more including mergers,

Page 10, America’s Shifting Source of Growth

acquisitions, acquisitions of a partial interest

County Business Patterns, various years.

that involves 40 percent stake in the target or

Employment growth measured as the growth

an investment of at least $100 million, divesti-

over the previous decade in high-tech industry

tures, and leveraged transactions that resulted

employment as a share of total employment

in an ownership change.

growth. Information technology producing
industries in 1970: SIC codes 283, 3573,
3579, 3650, 3660, 3671–3674, 3679, 3810,
3821, 384, 4100, 4200, 4500, 4600, 4700,
481, 483, 489, 4900, 62, 8000, 8100 and
8200. In 1980: SIC codes 283, 3573, 3579,
3650, 3660, 3671–3674, 3679, 3810, 383,
384, 4100, 4200, 4500, 4600, 4700, 481,
483, 489, 4900, 5022, 512, 62, 8000, 8100
and 8200. In 1990 and 1997: SIC codes 2830,
3571, 3572, 3575, 3577–3579, 3650, 3660,
3671, 3672, 3674–3679, 3695, 3823,
3825–3827, 3840, 4100, 4200, 4500, 4600,
4700, 4810, 4830, 4840, 4890, 4900, 5045,
5120, 5734, 6200, 7371–7379, 8000, 8100
and 8200.
Page 11, The Shifting Values of American
Business: 1970, Compustat. 1999, Bloomberg.

Transport Association, www.air-transport.org.

Credits
Photos and illustrations courtesy of Advanced
Bionics Corp. (p.16 upper); Western Geophysical division of Baker Hughes Inc. (p.14 upper);
Canon USA Inc., 800-828-4040 (p. 21 upper);
Cellemetry LLC, www.cellemetry.com

Page 20, Declining Long-Run Average Cost:

(p.14 lower); Cyrano Sciences Inc.,

The Supply-Side Revolution

www.cyranosciences.com (p.21 lower right);

Average pill cost: Drug Discovery/Technology

Dallas Semiconductor Corp. (p. 7o); Electronic

News, March 1999.

I.D. Inc. by Destron Fearing Corp. (p.19);

Internet access cost and host density:

Ford Motor Co. (pp.10, 13); IBM (p. 5 right);

OECD Communications Outlook (Paris:

Intel Corp. (pp. 5 center; 7b, c, f); Motorola Inc.

Organization for Economic Cooperation and

(p. 21 center); NASA/JPL/California Institute

Development, 1999), Tables 5.1 and 7.15.

of Technology (front cover; pp. 7a, h, i, j, l;

Internet access cost is the peak rate of an Inter-

21 lower left); Nanogen Inc., San Diego, Calif.

net access basket in 1998, measured in U.S.

(p. 7m); OmniVision Technologies Inc.,

dollars adjusted for purchasing-power parity.

www.ovt.com (p. 7n); Pan Am SimCom Training

Wireless rates in Dallas: Wireless Week,

Centers, www.simulator.com (p.13);

www.wirelessweek.com. Data are as of March

The Pennsylvania State University College of

22, 1999.

Agricultural Sciences (p.19 lower);

Page 22, A Parade of Ps and Qs
Price vs. quantity of microprocessors:
“Price Indexes for Selected Semiconductors,
1974–96”; Texas Instruments. Quantity

Page 13, Statistics on auto microchips:

includes microprocessors, microcontrollers and

Charles Mantel, Selantek Inc., Houston.

digital signal processors.

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

Annual miles flown and cost per mile: Air

SIGMET Inc., Westford, Mass. (p.7p);
Texas Instruments Inc. (pp. 5 left; 7d, e, k; 15);
Washington University School of Medicine in
St. Louis (p. 16 lower). Photo from Replay TV
Inc. (p. 7g) originally appeared in Wired.

26

Economic Overview

TheYEAR
inReview
The Federal Reserve Bank of Dallas
marked the final year of the century
with the same spirit and commitment that defined the Bank when its
doors opened in 1914. Initiatives and
services in 1999 reflected the Bank’s
continued dedication to efficient and
reliable financial services, sound
banking and robust economic
growth in the Eleventh District.

In 1999 the Eleventh District continued the economic dynamism that
prevailed throughout the decade. The
District’s reduced sensitivity to oil
prices and the increased diversification of its export markets diminished
the impact of low oil prices in early
1999 and the lingering effects of the
1997–98 Asian financial crisis.
One engine of the Texas economy
has been the technology sector,
which grew at almost twice the rate
of total nonfarm job growth in the
1990s. High tech was still reeling
from the Asian crisis in the first half
of 1999 but bounced back in the second half. With the Y2K rollover out of
the way, firms are poised to increase
spending on technology.
The service sector was another
source of strength for the Texas economy last year. This was especially
true of distribution services such as
trucking and warehousing, air trans-

portation, and business and financial
services, all of which showed strong
gains from trade with our NAFTA
partners.
As the world economy picked up
steam, Texas exports rose sharply
during 1999.
In November Texas posted its lowest unemployment rate (4.1 percent)
in nearly 20 years. Many of the
state’s large metropolitan areas have
very low unemployment and very
high labor force participation rates.
To maintain employment growth in
excess of working-age population
growth, Texas needs continued inmigration.
The ingredients for strong growth
in 2000 are all in place: higher oil
prices, a strong world economy, and
increasingly significant high-tech
and distribution sectors ready to
capitalize on the growth in trade and
technology.

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

27

Financial Services
In 1999 the Dallas Fed continued
to offer financial institutions enhanced services and technology to
support a stable and efficient payments system. Through seminars
and advisory groups, the Dallas Fed
gained insights from customers into
the value of Federal Reserve payments services and their use of Bank
products and services.
Through its role as the support
Bank for the Reserve Banks using
IBM check processing equipment,
the Dallas Fed contributed to planning for a new processing infrastructure that will enhance and standardize Reserve Bank check services. All
Reserve Banks will move to the new
processing platform over the next
few years.
The Dallas Fed experienced a
record year in currency operations,
processing nearly 2.1 billion Federal
Reserve notes. Currency inventory
was increased in anticipation of the
Y2K needs of District financial instiFederal Reserve Bank of Dallas 1999 ANNUAL REPORT

tutions. The Dallas Office provided
warehousing services for the new
notes and for notes from other
Reserve Banks. The Dallas Fed also
helped prepare for Y2K by processing excess currency for other Reserve
Banks.
A Dallas Fed official led the Federal Reserve’s effort to identify strategic locations, accessible to financial
institutions across the country, for
storing currency during the century
rollover. This major leadership effort
required coordination among all Federal Reserve Banks, all locations and
the armored carrier industry.
The healthy regional economy
and strong business climate were
reflected in the volume of payment
services items processed in 1999.
The volume of processed checks rose
by 4.4 percent, and more payment
transactions moved to electronic
delivery. The number of items presented electronically rose to 22.4
percent of all items processed, and
the volume of commercial auto-

mated clearinghouse (ACH) transactions increased by 14.3 percent.
The Dallas Fed began providing
three new services for the U.S. Treasury last year. The department’s
Bureau of the Public Debt consolidated 36 sites handling Treasury securities into three Fed offices—Dallas,
Boston and Minneapolis—to improve
customer service and reduce costs.
The Dallas Fed also was selected as
the nation’s central processor for Treasury coupons. Additionally, the Treasury Department chose the Dallas Fed
to manage the national Electronic
Transfer Account (ETASM) program,
which will target millions of federal
benefit recipients currently receiving
payment by check.
The century rollover presented the
Dallas Fed and the financial industry
with a unique challenge last year.
Extensive preparations and close
working relationships with customers
ensured a high level of readiness that
paid off in a quiet, orderly transition
from l999 to the year 2000.

28

Banking Supervision;
Discount and Credit
The Eleventh District’s banking
industry posted another year of solid
performance, with continued strong
loan growth, stable net interest margins, healthy earnings and high capital levels. The year culminated with
the passage of the most significant
piece of banking legislation since
1933. The Gramm–Leach–Bliley Act,
signed into law November 12, repealed Depression-era laws that
barred banks from insurance and
securities activities.
Banking Supervision staff worked
with federal agencies to conduct Y2K
compliance checks for all statemember banks, bank holding companies, and key service providers
and vendors in the District. Discount
and Credit staff worked with banks to
file borrowing documents and identify collateral for possible loans from
the Dallas Fed. As 1999 rolled over
into the year 2000, all District financial institutions were armed with
plans for business resumption and
management of liquidity during the
century date change period.

The Dallas Fed held workshops for
boards of state member banks and
others on their roles and responsibilities as well as the expectations of
examiners. The Bank also hosted an
interagency conference of senior federal banking regulators and a
national forum for veteran consumer
affairs examiners. The Dallas Fed was
selected as the site for a national help
desk for Federal Reserve System and
state banking examiners using automated community bank examination products.

Research and
Public Affairs
The Dallas Fed focused major
research on public policy issues of
interest to the business community
and opinion leaders. Conferences,
publications, briefings and presentations provided information and
analysis on dollarization, the euro,
the changing U.S. fiscal outlook, the
monetary policy implications of oil
prices, unilateral trade liberalization,
minimum wage legislation and hightech industries.
The Bank addressed international
issues by sponsoring, together with
the World Bank, a major conference
on banking privatization. The Dallas
Fed joined the World Bank, the Central Bank of Argentina and two major
universities to cosponsor a conference on economic and financial
issues Latin America faces.
An El Paso Branch conference on
NAFTA drew economists, trade
experts and other participants from
the United States, Canada and Mex-

ico. At the San Antonio Branch, civic
leaders from around the country
attended a conference on the economics of urban planning. The Bank
also cohosted five forums with the
National Center for Policy Analysis.
In 1999 the Bank launched its
new, award-winning Internet site
(www.dallasfed.org). The site features information on Dallas Fed
operations, the Center for Latin
American Economics, money and
banking, technology, free enterprise,
and regional, national and global
economies.
The Dallas Fed continued to support economic education by conducting conferences and workshops for
university faculty, high school teachers and students in the Eleventh District. Among them was a new conference to help teachers prepare
students for advanced placement in
economics. The Bank also encouraged the study of economics by
sponsoring a student essay contest
and the Fed Challenge competition.
The Dallas Fed’s Community Affairs
division provided information on
public/private partnerships, resources
and innovative models that help promote community and economic
development and fair and impartial
access to credit. The Bank cosponsored a national conference on business access to capital and credit and
held a District symposium on transportation’s importance to rural economic development.

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

29

Senior Management
From left:
Joel L. Koonce, Jr.
Personnel Services

J. Tyrone Gholson
Cash, Securities, Customer Services,
Operations Analysis and TreasuryDirect

Robert Smith III
Houston Branch

Millard E. Sweatt

Larry J. Reck

Legal, Protection and Services

Information Technology Services
and Payments Services

Luther E. Richards
San Antonio Branch (Acting)

Robert D. McTeer, Jr.
President and CEO

Robert D. Hankins

Sam C. Clay
El Paso Branch

W. Michael Cox
Chief Economist

Banking Supervision, Discount and Credit,
and Financial Industry Studies

Harvey Rosenblum

Helen E. Holcomb

Not pictured:
James L. Stull

First Vice President and COO

Research and Statistics

San Antonio Branch
Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

30

Boards of Directors
Dallas

Dudley K. Montgomery

Roger R. Hemminghaus

Gayle M. Earls

James A. Martin,

H. B. Zachry, Jr.

President and CEO,
The Security State Bank
of Pecos

(Chairman) Chairman, Ultramar
Diamond Shamrock Corp.

President and CEO,
The Independent BankersBank

Chairman and CEO,
H. B. Zachry Co.

Kirk A. McLaughlin

Judy Ley Allen

President and CEO,
Security Bank

Partner, Allen Investments

(Deputy Chairman) Retired
Second General Vice President,
International Association of
Bridge, Structural, Ornamental
& Reinforcing Iron Workers

Dan Angel
President, Stephen F.
Austin State University

Julie Spicer England
Vice President,
Texas Instruments

El Paso
Not pictured:
Beauregard Brite White
(Chairman Pro Tem)
Rancher, J. E. White, Jr. & Sons

Cecil E. Nix

Melissa W. O’Rourke

Lester L. Parker

International Brotherhood of
Electrical Workers, Local 460

President, Charlotte’s Inc.

Banker

Gail Darling

Patricia Z. Holland-Branch

James D. Renfrow

CEO, Gail Darling Inc.

(Chairman) President and CEO,
HB/PZH Commercial
Environments Inc.

President and CEO,
The Carlsbad National Bank

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

31

Houston

Richard Weekley

Judith B. Craven

Alan R. Buckwalter III

Ray B. Nesbitt

Chairman,
Weekley Development Co.

Physician/Administrator

Chairman and CEO,
Chase Bank of Texas

Retired President,
Exxon Chemical Co.

Malcolm Gillis
President, Rice University

Edward O. Gaylord (Chairman)
Chairman,
Jacintoport Terminal Co.

Peggy Pearce Caskey
(Chairman Pro Tem)
President, PPC Holdings LLC

San Antonio
Not pictured:
Ron R. Harris
(Chairman Pro Tem)
President and CEO,
Pervasive Software

R. Tom Roddy

Juliet V. Garcia

Douglas G. Macdonald

Chairman, CaminoReal Bank

President, University of Texas
at Brownsville

President, South Texas National
Bank

Arthur Emerson

Patty Puig Mueller (Chairman)

Vice President/General Manager,
KVDA-TV 60 Telemundo

Vice President/Finance,
Mueller Energetics Corp.

Marvin L. Ragsdale
President, Iron Workers’ District
Council of the State of Texas

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

32

Federal Reserve
Bank of Dallas
Officers

W. Arthur Tribble

Lawrence G. Rex

Vice President

Audit Officer

Meredith N. Black

Mark A. Wynne

Assistant Vice President

Research Officer

Small Business
and Agriculture
Advisory Council

Dallas

Stephen P. A. Brown

Mine Yücel

Stephen K. Balas

Assistant Vice President and Senior
Economist

Research Officer

Terry B. Campbell

El Paso
Vice President in Charge

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

J. Eloise Guinn

Gilbert D. Gaedcke

Robert D. McTeer, Jr.
President and CEO

Helen E. Holcomb
First Vice President and COO

Assistant Vice President

KaSandra Goulding

W. Michael Cox

Assistant Vice President

Senior Vice President and
Chief Economist

Johnny L. Johnson

J. Tyrone Gholson
Senior Vice President

Robert D. Hankins
Senior Vice President

Joel L. Koonce, Jr.
Senior Vice President

Larry J. Reck
Senior Vice President

Harvey Rosenblum
Senior Vice President and
Director of Research

Assistant Vice President

C. LaVor Lym

Sam C. Clay

Assistant Vice President

Javier R. Jimenez
Assistant Vice President

Assistant Vice President

James R. McCullin
Assistant Vice President

Dean A. Pankonien
Assistant Vice President

John R. Phillips
Assistant Vice President

Larry C. Ripley

Chairman and CEO
Gaedcke Equipment Co.
Houston

Robert D. Josserand
President
AzTx Cattle Co.
Hereford, Texas

Houston
Robert Smith III
Senior Vice President in Charge

Paula Lambert

René G. Gonzales
Vice President

Founder and President
Mozzarella Co.
Dallas

Luther E. Richards

Robert W. Latimer

Vice President

Sharon A. Sweeney

Assistant Vice President

President
Adobe Corporate Capital LLC
San Antonio

Senior Vice President,
General Counsel,
Ethics Officer and Secretary

Assistant Vice President,
Associate General Counsel and
Associate Secretary

Robert W. Gilmer

Joe D. Mitchell

Earl Anderson

Gayle Teague

Daron D. Peschel

Millard E. Sweatt

Assistant Vice President

Richard J. Burda

Vice President

Assistant Vice President

Operations Officer

Shareholder, Director and President
Mitchell & Jenkins PC, Attorneys
and Counselors at Law
Dallas

Basil J. Asaro

Michael N. Turner

Marilyn Snider

Bookman Peters*

Operations Officer

Certified Public Accountant and
Financial Consultant
Bryan, Texas

Vice President

Assistant Vice President

Gloria V. Brown

Nancy Vickrey

Assistant Vice President

Vice President

Assistant Vice President

San Antonio

Lyne H. Carter

Evelyn LV. Watkins

James L. Stull

Timothy A. Shell

Taylor H. Barbee

President
ExecuTrain of Houston Inc.
Houston

Assistant Vice President

Assistant Vice President

Steven R. Vandegrift

Marion E. White

Richard A. Gutierrez

Vice President

Assistant Vice President

Senior Vice President in Charge

John V. Duca

Stephen M. Welch

Vice President and Senior Economist

Vice President

Assistant Vice President

Assistant Vice President

Chairman
Charitygift Services Inc.
Board Member and Past Chairman
Austin Software Council
Austin

William C. Gruben

E. Ann Worthy

Effective January 1, 2000

*Resigned effective September 28,
1999.

Billy J. Dusek
Vice President

Assistant Vice President

Assistant Vice President

Robert G. Feil

Bob W. Williams

Karen Ojeda Salisbury

Vice President and Senior Economist

Assistant Vice President

Kermit S. Harmon, Jr.

Jeffery W. Gunther

Vice President

Research Officer

Evan F. Koenig

Donald L. Jackson

Federal Advisory
Council Member

Vice President and Senior Economist

Operations Officer

Richard W. Evans, Jr.

Joanna O. Kolson

Kathy K. Johnsrud

Chairman and CEO
Frost National Bank
San Antonio

Vice President

Statistics Officer

Kenneth V. McKee

Harvey R. Mitchell III

Vice President and General Auditor

Operations Officer

Larry M. Snell

William C. Morse, Jr.

Vice President

Effective December 31, 1999

Operations Officer

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

33
February 10, 2000
To the Board of Directors of the
Federal Reserve Bank of Dallas:
The management of the Federal Reserve Bank of Dallas (FRBD) is responsible for the preparation and fair presentation of the Statement of Condition,
Statement of Income, and Statement of Changes in Capital as of December 31,
1999 (the “Financial Statements”). The Financial Statements have been prepared in conformity with the accounting principles, policies, and practices established by the Board of Governors of the Federal Reserve System and as set forth
in the Financial Accounting Manual for the Federal Reserve Banks, and as such,
include amounts, some of which are based on judgments and estimates of management.
The management of the FRBD is responsible for maintaining an effective
process of internal controls over financial reporting including the safeguarding
of assets as they relate to the Financial Statements. Such internal controls are
designed to provide reasonable assurance to management and to the Board of
Directors regarding the preparation of reliable Financial Statements. This
process of internal controls contains self-monitoring mechanisms, including, but
not limited to, divisions of responsibility and a code of conduct. Once identified, any material deficiencies in the process of internal controls are reported to
management, and appropriate corrective measures are implemented.
Even an effective process of internal controls, no matter how well designed,
has inherent limitations, including the possibility of human error, and therefore
can provide only reasonable assurance with respect to the preparation of reliable
Financial Statements.
The management of the FRBD assessed its process of internal controls over
financial reporting including the safeguarding of assets reflected in the Financial
Statements, based upon the criteria established in the “Internal Control–Integrated Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this assessment, the management of
the FRBD believes that the FRBD maintained an effective process of internal
controls over financial reporting including the safeguarding of assets as they
relate to the Financial Statements.

President
Federal Reserve Bank of Dallas

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

First Vice President
Federal Reserve Bank of Dallas

34
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of the
Federal Reserve Bank of Dallas:

We have examined management’s assertion that the Federal Reserve Bank of
Dallas (“FRB Dallas”) maintained effective internal control over financial reporting and the safeguarding of assets as they relate to the Financial Statements as of
December 31, 1999, included in the accompanying Management’s Assertion.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants, and accordingly, included
obtaining an understanding of the internal control over financial reporting, testing, and evaluating the design and operating effectiveness of the internal control,
and such other procedures as we considered necessary in the circumstances. We
believe that our examination provides a reasonable basis for our opinion.
Because of inherent limitations in any internal control, misstatements due to
error or fraud may occur and not be detected. Also, projections of any evaluation
of the internal control over financial reporting to future periods are subject to the
risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management’s assertion that the FRB Dallas maintained effective
internal control over financial reporting and over the safeguarding of assets as
they relate to the Financial Statements as of December 31, 1999, is fairly stated,
in all material respects, based upon criteria described in “Internal Control–Integrated Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission.

Dallas, Texas
March 3, 2000

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

35
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Governors of the Federal Reserve System
and the Board of Directors of the Federal Reserve Bank of Dallas:

We have audited the accompanying statements of condition of the Federal
Reserve Bank of Dallas (the “Bank”) as of December 31, 1999 and 1998, and
the related statements of income and changes in capital for the years then
ended. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on the Financial Statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 3, the financial statements were prepared in conformity
with the accounting principles, policies, and practices established by the Board
of Governors of the Federal Reserve System. These principles, policies, and
practices, which were designed to meet the specialized accounting and reporting needs of the Federal Reserve System, are set forth in the “Financial
Accounting Manual for Federal Reserve Banks” and constitute a comprehensive
basis of accounting other than accounting principles generally accepted in the
United States.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Bank as of December 31, 1999 and
1998, and results of its operations for the years then ended, on the basis of
accounting described in Note 3.

Dallas, Texas
March 3, 2000

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

36

Statements of Condition (in millions)
December 31, 1999

December 31, 1998

ASSETS

Gold certificates
Special drawing rights certificates
Coin
Items in process of collection
Loans to depository institutions
U.S. government and federal agency securities, net
Investments denominated in foreign currencies
Accrued interest receivable
Interdistrict settlement account
Bank premises and equipment, net
Other assets
Total assets

$

575
341
16
296
10
24,112
616
243
—
178
15
_________
$ 26,402
_________
_________

$

530
367
40
392
—
20,764
1,029
196
1,680
182
18
_________
$ 25,198
_________
_________

$

15,269

$ 23,072

1,246
6
269
44
9,087
51
8
_________
$ 25,980
_________

1,166
9
334
103
—
49
11
_________
$ 24,744
_________

211
211
_________
$
422
_________
$ 26,402
_________
_________

227
227
_________
$
454
_________
$ 25,198
_________
_________

LIABILITIES AND CAPITAL

Liabilities
Federal Reserve notes outstanding, net
Deposits:
Depository institutions
Other deposits
Deferred credit items
Surplus transfer due U.S. Treasury
Interdistrict settlement account
Accrued benefit cost
Other liabilities
Total liabilities
Capital
Capital paid-in
Surplus
Total capital
Total liabilities and capital

The accompanying notes are an integral part
of these financial statements.

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

37

Statements of Income (in millions)

FOR THE YEARS ENDED

December 31, 1999

December 31, 1998

INTEREST INCOME

Interest on U.S. government and federal agency securities
Interest on foreign currencies
Total interest income

$

1,332
9
_________

$

1,136
23
_________

$
1,341
_________

$
1,159
_________

$

56
11
(19)
(1)
1
_________
$
48
_________

$

56
11
97
2
1
_________
$
167
_________

$

85
12
11
31
50
_________
$
189
_________

$

$
1,200
_________
_________

$
1,143
_________
_________

$

$

OTHER OPERATING INCOME

Income from services
Reimbursable services to government agencies
Foreign currency gains (losses), net
U.S. government securities gains (losses), net
Other income
Total other operating income
OPERATING EXPENSES

Salaries and other benefits
Occupancy expense
Equipment expense
Assessments by Board of Governors
Other expenses
Total operating expenses
Net income prior to distribution

81
11
10
27
54
_________
$
183
_________

DISTRIBUTION OF NET INCOME

Dividends paid to member banks
Transferred (from) surplus
Payments to U.S. Treasury as interest on
Federal Reserve notes
Payments to U.S. Treasury as required by statute
Total distribution

The accompanying notes are an integral part
of these financial statements.

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

13
(16)

1,203
—
_________
$
1,200
_________
_________

14
(43)

441
731
______
$
1,143
_________
_________

38

Statements of Changes in Capital
For the Years Ended December 31, 1999,
and December 31, 1998 (in millions)

Capital Paid-In
BALANCE AT JANUARY 1, 1998
(5.6 MILLION SHARES)

$

283

Surplus
$

270

Total Capital
$

553

Net income transferred (from) surplus

—

( 43 )

( 43 )

Net change in capital stock (redeemed)
(1.1 million shares)

( 56 )
_____

—
_____

( 56 )
_____

BALANCE AT DECEMBER 31, 1998
(4.5 MILLION SHARES)

$

227

$

227

$

454

Net income transferred (from) surplus

—

( 16 )

( 16 )

Net change in capital stock (redeemed)
(0.3 million shares)

( 16 )
_____

—
_____

( 16 )
_____

BALANCE AT DECEMBER 31, 1999
(4.2 MILLION SHARES)

$

211
_____
_____

$

211
_____
_____

$

422
_____
_____

The accompanying notes are an integral part
of these financial statements.

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

Notes to
Financial Statements
1. ORGANIZATION
The Federal Reserve Bank of Dallas (“Bank”) is part of the Federal Reserve System (“System”) created by Congress under the Federal Reserve Act of 1913 (“Federal Reserve
Act”), which established the central bank of the United States. The System consists of
the Board of Governors of the Federal Reserve System (“Board of Governors”) and 12
Federal Reserve Banks (“Reserve Banks”). The Reserve Banks are chartered by the federal government and possess a unique set of governmental, corporate, and central bank
characteristics. Other major elements of the System are the Federal Open Market Committee (“FOMC”) and the Federal Advisory Council. The FOMC is composed of members
of the Board of Governors, the president of the Federal Reserve Bank of New York
(“FRBNY”), and, on a rotating basis, four other Reserve Bank presidents.
Structure
The Bank and its branches in El Paso, Houston, and San Antonio serve the Eleventh
Federal Reserve District, which includes Texas and portions of Louisiana and New
Mexico. In accordance with the Federal Reserve Act, supervision and control of the
Bank are exercised by a board of directors. Banks that are members of the System
include all national banks and any state-chartered bank that applies and is approved for
membership in the System.
Board of Directors
The Federal Reserve Act specifies the composition of the board of directors for each of
the Reserve Banks. Each board is composed of nine members serving three-year terms:
three directors, including those designated as chairman and deputy chairman, are
appointed by the Board of Governors, and six directors are elected by member banks.
Of the six elected by member banks, three represent the public and three represent
member banks. Member banks are divided into three classes according to size. Member banks in each class elect one director representing member banks and one representing the public. In any election of directors, each member bank receives one vote,
regardless of the number of shares of Reserve Bank stock it holds.
2. OPERATIONS AND SERVICES
The System performs a variety of services and operations. Functions include formulating and conducting monetary policy; participating actively in the payments mechanism, including large-dollar transfers of funds, automated clearinghouse operations,
and check processing; distributing coin and currency; providing fiscal agency functions
for the U.S. Treasury and certain federal agencies; serving as the federal government’s
bank; providing short-term loans to depository institutions; serving the consumer and
the community by providing educational materials and information regarding consumer laws; supervising bank holding companies and state member banks; and
administering other regulations of the Board of Governors. The Board of Governors’
operating costs are funded through assessments on the Reserve Banks.
The FOMC establishes policy regarding open market operations, oversees these operations, and issues authorizations and directives to the FRBNY for its execution of
transactions. Authorized transaction types include direct purchase and sale of securities, matched sale–purchase transactions, purchase of securities under agreements to
resell, and lending of U.S. government securities. Additionally, the FRBNY is authorized by the FOMC to hold balances of, and to execute spot and forward foreign
exchange and securities contracts in, 14 foreign currencies; maintain reciprocal currency arrangements (“F/X swaps”) with various central banks; and “warehouse” foreign currencies for the U.S. Treasury and Exchange Stabilization Fund (“ESF”) through
the Reserve Banks.

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

39

40
3. SIGNIFICANT ACCOUNTING POLICIES
Accounting principles for entities with the unique powers and responsibilities of the
nation’s central bank have not been formulated by the Financial Accounting Standards
Board. The Board of Governors has developed specialized accounting principles and
practices that it believes are appropriate for the significantly different nature and function of a central bank as compared with the private sector. These accounting principles
and practices are documented in the “Financial Accounting Manual for Federal Reserve
Banks” (“Financial Accounting Manual”), which is issued by the Board of Governors. All
Reserve Banks are required to adopt and apply accounting policies and practices that
are consistent with the Financial Accounting Manual.
The financial statements have been prepared in accordance with the Financial Accounting Manual. Differences exist between the accounting principles and practices of the System and generally accepted accounting principles (“GAAP”) in the United States. The primary differences are the presentation of all security holdings at amortized cost rather
than at the fair value presentation requirements of GAAP, and the accounting for
matched sale–purchase transactions as separate sales and purchases rather than
secured borrowings with pledged collateral, as is required by GAAP. In addition, the Bank
has elected not to include a Statement of Cash Flows or a Statement of Comprehensive
Income. The Statement of Cash Flows has not been included, as the liquidity and cash
position of the Bank are not of primary concern to users of these financial statements.
The Statement of Comprehensive Income, which comprises net income plus or minus
certain adjustments, such as the fair value adjustment for securities, has not been
included because, as stated above, the securities are recorded at amortized cost and
there are no other adjustments in the determination of Comprehensive Income applicable to the Bank. Other information regarding the Bank’s activities is provided in, or
may be derived from, the Statements of Condition, Income, and Changes in Capital.
Therefore, a Statement of Cash Flows or a Statement of Comprehensive Income would
not provide any additional useful information. There are no other significant differences
between the policies outlined in the Financial Accounting Manual and GAAP.
The preparation of the financial statements in conformity with the Financial Accounting Manual requires management to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ from those
estimates. Unique accounts and significant accounting policies are explained below.
a. Gold Certificates
The Secretary of the Treasury is authorized to issue gold certificates to the Reserve
Banks to monetize gold held by the U.S. Treasury. Payment for the gold certificates by
the Reserve Banks is made by crediting equivalent amounts in dollars into the account
established for the U.S. Treasury. These gold certificates held by the Reserve Banks are
required to be backed by the gold of the U.S. Treasury. The U.S. Treasury may reacquire
the gold certificates at any time, and the Reserve Banks must deliver them to the U.S.
Treasury. At such time, the U.S. Treasury’s account is charged and the Reserve Banks’
gold certificate accounts are lowered. The value of gold for purposes of backing the gold
certificates is set by law at $42-2/9 a fine troy ounce. The Board of Governors allocates
the gold certificates among Reserve Banks once a year based upon Federal Reserve
notes outstanding in each District at the end of the preceding year.

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

41
b. Special Drawing Rights Certificates
Special drawing rights (“SDRs”) are issued by the International Monetary Fund (“Fund”)
to its members in proportion to each member’s quota in the Fund at the time of
issuance. SDRs serve as a supplement to international monetary reserves and may be
transferred from one national monetary authority to another. Under the law providing
for U.S. participation in the SDR system, the Secretary of the U.S. Treasury is authorized to issue SDR certificates, somewhat like gold certificates, to the Reserve Banks. At
such time, equivalent amounts in dollars are credited to the account established for the
U.S. Treasury, and the Reserve Banks’ SDR certificate accounts are increased. The
Reserve Banks are required to purchase SDRs, at the direction of the U.S. Treasury, for
the purpose of financing SDR certificate acquisitions or for financing exchange stabilization operations. The Board of Governors allocates each SDR transaction among
Reserve Banks based upon Federal Reserve notes outstanding in each District at the
end of the preceding year.
c. Loans to Depository Institutions
The Depository Institutions Deregulation and Monetary Control Act of 1980 provides
that all depository institutions that maintain reservable transaction accounts or nonpersonal time deposits, as defined in Regulation D issued by the Board of Governors,
have borrowing privileges at the discretion of the Reserve Banks. Borrowers execute
certain lending agreements and deposit sufficient collateral before credit is extended.
Loans are evaluated for collectibility, and currently all are considered collectible and
fully collateralized. If any loans were deemed to be uncollectible, an appropriate
reserve would be established. Interest is recorded on the accrual basis and is charged
at the applicable discount rate established at least every 14 days by the boards of
directors of the Reserve Banks, subject to review by the Board of Governors. However,
Reserve Banks retain the option to impose a surcharge above the basic rate in certain
circumstances.
The Board of Governors established a Special Liquidity Facility (SLF) to make discount
window credit readily available to depository institutions in sound financial condition
around the century date change (October 1, 1999, to April 7, 2000) in order to meet
unusual liquidity demands and to allow institutions to confidently commit to supplying loans to other institutions and businesses during this period. Under the SLF, collateral requirements are unchanged from normal discount window activity and loans
are made at a rate of 150 basis points above FOMC’s target federal funds rate.
d. U.S. Government and Federal Agency Securities
and Investments Denominated in Foreign Currencies
The FOMC has designated the FRBNY to execute open market transactions on its
behalf and to hold the resulting securities in the portfolio known as the System Open
Market Account (“SOMA”). In addition to authorizing and directing operations in the
domestic securities market, the FOMC authorizes and directs the FRBNY to execute
operations in foreign markets for major currencies in order to counter disorderly conditions in exchange markets or to meet other needs specified by the FOMC in carrying
out the System’s central bank responsibilities.
Purchases of securities under agreements to resell and matched sale–purchase transactions are accounted for as separate sale and purchase transactions. Purchases under
agreements to resell are transactions in which the FRBNY purchases a security and
sells it back at the rate specified at the commencement of the transaction. Matched
sale–purchase transactions are transactions in which the FRBNY sells a security and
buys it back at the rate specified at the commencement of the transaction.

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

42
Effective April 26, 1999, FRBNY was given sole authorization by the FOMC to lend
U.S. government securities held in the SOMA to U.S. government securities dealers
and to banks participating in U.S. government securities clearing arrangements, in
order to facilitate the effective functioning of the domestic securities market. These
securities-lending transactions are fully collateralized by other U.S. government securities. FOMC policy requires FRBNY to take possession of collateral in amounts in
excess of the market values of the securities loaned. The market values of the collateral and the securities loaned are monitored by FRBNY on a daily basis, with additional collateral obtained as necessary. The securities loaned continue to be accounted
for in the SOMA. Prior to April 26, 1999, all Reserve Banks were authorized to engage
in such lending activity.
Foreign exchange contracts are contractual agreements between two parties to exchange specified currencies at a specified price on a specified date. Spot foreign contracts normally settle two days after the trade date, whereas the settlement date on
forward contracts is negotiated between the contracting parties, but will extend
beyond two days from the trade date. The FRBNY generally enters into spot contracts,
with any forward contracts generally limited to the second leg of a swap/warehousing
transaction.
The FRBNY, on behalf of the Reserve Banks, maintains renewable, short-term F/X
swap arrangements with authorized foreign central banks. The parties agree to
exchange their currencies up to a prearranged maximum amount and for an agreedupon period of time (up to 12 months) at an agreed-upon interest rate. These arrangements give the FOMC temporary access to foreign currencies that it may need for
intervention operations to support the dollar and give the partner foreign central bank
temporary access to dollars it may need to support its own currency. Drawings under
the F/X swap arrangements can be initiated by either the FRBNY or the partner foreign central bank, and must be agreed to by the drawee. The F/X swaps are structured so that the party initiating the transaction (the drawer) bears the exchange rate
risk upon maturity. The FRBNY will generally invest the foreign currency received
under an F/X swap in interest-bearing instruments.
Warehousing is an arrangement under which the FOMC agrees to exchange, at the
request of the Treasury, U.S. dollars for foreign currencies held by the Treasury or
ESF over a limited period of time. The purpose of the warehousing facility is to supplement the U.S. dollar resources of the Treasury and ESF for financing purchases of
foreign currencies and related international operations.
In connection with its foreign currency activities, the FRBNY, on behalf of the Reserve
Banks, may enter into contracts that contain varying degrees of off-balance sheet market risk, because they represent contractual commitments involving future settlement,
and counterparty credit risk. The FRBNY controls credit risk by obtaining credit
approvals, establishing transaction limits, and performing daily monitoring procedures.
While the application of current market prices to the securities currently held in the
SOMA portfolio and investments denominated in foreign currencies may result in values substantially above or below their carrying values, these unrealized changes in
value would have no direct effect on the quantity of reserves available to the banking
system or on the prospects for future Reserve Bank earnings or capital. Both the
domestic and foreign components of the SOMA portfolio from time to time involve
transactions that can result in gains or losses when holdings are sold prior to maturity. However, decisions regarding the securities and foreign currencies transactions,
including their purchase and sale, are motivated by monetary policy objectives rather
than profit. Accordingly, earnings and any gains or losses resulting from the sale of
such currencies and securities are incidental to the open market operations and do not
motivate its activities or policy decisions.

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

43
U.S. government and federal agency securities and investments denominated in foreign currencies comprising the SOMA are recorded at cost, on a settlement-date basis,
and adjusted for amortization of premiums or accretion of discounts on a straight-line
basis. Interest income is accrued on a straight-line basis and is reported as “Interest
on U.S. government securities and federal agency securities” or “Interest on foreign
currencies,” as appropriate. Income earned on securities-lending transactions is
reported as a component of “Other income.” Gains and losses resulting from sales of
securities are determined by specific issues based on average cost. Gains and losses
on the sales of U.S. government and federal agency securities are reported as “U.S.
government securities gains (losses), net.” Foreign-currency-denominated assets are
revalued monthly at current market exchange rates in order to report these assets in
U.S. dollars. Realized and unrealized gains and losses on investments denominated in
foreign currencies are reported as “Foreign currency gains (losses), net.” Foreign currencies held through F/X swaps, when initiated by the counterparty, and warehousing
arrangements are revalued monthly, with the unrealized gain or loss reported by the
FRBNY as a component of “Other assets” or “Other liabilities,” as appropriate.
Balances of U.S. government and federal agency securities bought outright, investments denominated in foreign currency, interest income, amortization of premiums
and discounts on securities bought outright, gains and losses on sales of securities,
and realized and unrealized gains and losses on investments denominated in foreign
currencies, excluding those held under an F/X swap arrangement, are allocated to
each Reserve Bank. Effective April 26, 1999, income from securities lending transactions undertaken by FRBNY was also allocated to each Reserve Bank. Securities purchased under agreements to resell and unrealized gains and losses on the revaluation
of foreign currency holdings under F/X swaps and warehousing arrangements are allocated to the FRBNY and not to other Reserve Banks.
e. Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over estimated useful lives of assets ranging
from 2 to 50 years. New assets, major alterations, renovations, and improvements are
capitalized at cost as additions to the asset accounts. Maintenance, repairs, and minor
replacements are charged to operations in the year incurred.
f. Interdistrict Settlement Account
At the close of business each day, all Reserve Banks and branches assemble the payments due to or from other Reserve Banks and branches as a result of transactions involving accounts residing in other Districts that occurred during the day’s operations.
Such transactions may include funds settlement, check clearing and automated clearinghouse (“ACH”) operations, and allocations of shared expenses. The cumulative net
amount due to or from other Reserve Banks is reported as the “Interdistrict settlement
account.”
g. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United States. These notes are
issued through the various Federal Reserve Agents to the Reserve Banks upon deposit
with such Agents of certain classes of collateral security, typically U.S. government
securities. These notes are identified as issued to a specific Reserve Bank. The Federal
Reserve Act provides that the collateral security tendered by the Reserve Bank to the
Federal Reserve Agent must be equal to the sum of the notes applied for by such
Reserve Bank. In accordance with the Federal Reserve Act, gold certificates, special
drawing rights certificates, U.S. government and agency securities, loans, and investments denominated in foreign currencies are pledged as collateral for net Federal
Reserve notes outstanding. The collateral value is equal to the book value of the collat-

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

44
eral tendered, with the exception of securities, whose collateral value is equal to the par
value of the securities tendered. The Board of Governors may, at any time, call upon a
Reserve Bank for additional security to adequately collateralize the Federal Reserve
notes. The Reserve Banks have entered into an agreement that provides for certain
assets of the Reserve Banks to be jointly pledged as collateral for the Federal Reserve
notes of all Reserve Banks in order to satisfy their obligation of providing sufficent collateral for outstanding Federal Reserve notes. In the event that this collateral is insufficient, the Federal Reserve Act provides that Federal Reserve notes become a first and
paramount lien on all the assets of the Reserve Banks. Finally, as obligations of the
United States, Federal Reserve notes are backed by the full faith and credit of the U.S.
government.
The “Federal Reserve notes outstanding, net” account represents Federal Reserve notes
reduced by cash held in the vaults of the Bank of $21,412 million and $10,606 million
at December 31, 1999, and December 31, 1998, respectively.
h. Capital Paid-in
The Federal Reserve Act requires that each member bank subscribe to the capital stock
of the Reserve Bank in an amount equal to 6 percent of the capital and surplus of the
member bank. As a member bank’s capital and surplus change, its holdings of the
Reserve Bank’s stock must be adjusted. Member banks are those state-chartered banks
that apply and are approved for membership in the System and all national banks. Currently, only one-half of the subscription is paid-in, and the remainder is subject to call.
These shares are nonvoting, with a par value of $100. They may not be transferred or
hypothecated. By law, each member bank is entitled to receive an annual dividend of
6 percent on the paid-in capital stock. This cumulative dividend is paid semiannually.
A member bank is liable for Reserve Bank liabilities up to twice the par value of stock
subscribed by it.
i. Surplus
The Board of Governors requires Reserve Banks to maintain a surplus equal to the
amount of capital paid-in as of December 31. This amount is intended to provide additional capital and reduce the possibility that the Reserve Banks would be required to
call on member banks for additional capital. Reserve Banks are required by the Board
of Governors to transfer to the U.S. Treasury excess earnings, after providing for the costs
of operations, payment of dividends, and reservation of an amount necessary to equate
surplus with capital paid-in.
The Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66, Section 3002) codified the existing Board surplus policies as statutory surplus transfers, rather than as payments of interest on Federal Reserve notes, for federal government fiscal years 1998 and
1997 (which ended on September 30, 1998, and September 30, 1997, respectively). In
addition, the legislation directed the Reserve Banks to transfer to the U.S. Treasury additional surplus funds of $107 million and $106 million during fiscal years 1998 and 1997,
respectively. Reserve Banks were not permitted to replenish surplus for these amounts
during this time. Payments to the U.S. Treasury made after September 30, 1998, represent payment of interest on Federal Reserve notes outstanding.
The Consolidated Appropriations Act of 1999 (Public Law 106-113, Section 302) directed
the Reserve Banks to transfer to the U.S. Treasury additional surplus funds of $3,752 million during the federal government’s 2000 fiscal year. The Reserve Banks will make this
payment prior to September 30, 2000.
In the event of losses, payments to the U.S. Treasury are suspended until such losses
are recovered through subsequent earnings. Weekly payments to the U.S. Treasury vary
significantly.

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

45
j. Income and Cost Related to Treasury Services
The Bank is required by the Federal Reserve Act to serve as fiscal agent and depository
of the United States. By statute, the Department of the Treasury is permitted, but not
required, to pay for these services. The costs of providing fiscal agency and depository
services to the Treasury Department that have been billed but not paid are immaterial
and included in “Other expenses.”
k. Taxes
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on
real property, which are reported as a component of “Occupancy expense.”
4. U.S. GOVERNMENT AND FEDERAL AGENCY SECURITIES
Securities bought outright and held under agreements to resell are held in the SOMA at
the FRBNY. An undivided interest in SOMA activity, with the exception of securities held
under agreements to resell and the related premiums, discounts, and income, is allocated to each Reserve Bank on a percentage basis derived from an annual settlement
of interdistrict clearings. The settlement, performed in April of each year, equalizes
Reserve Bank gold certificate holdings to Federal Reserve notes outstanding. The Bank’s
allocated share of SOMA balances was approximately 4.983 percent and 4.547 percent
at December 31, 1999, and December 31, 1998, respectively.
The Bank’s allocated share of securities held in the SOMA at December 31 that were
bought outright, was as follows (in millions):
1999
Par value:
Federal agency
U.S. government
Bills
Notes
Bonds
Total par value

$

Unamortized premiums
Unaccreted discounts
Total allocated to Bank

1998
9

$

15

8,795
10,886
4,135
$23,825

8,856
8,543
3,159
$ 20,573

453
(166)
$24,112

336
(145)
$ 20,764

Total SOMA securities bought outright were $483,902 million and $456,667 million at
December 31, 1999, and December 31, 1998, respectively.
The maturities of U.S. government and federal agency securities bought outright, which
were allocated to the Bank at December 31, 1999, were as follows (in millions):
Par value

Maturities of Securities Held
Within 15 days
16 days to 90 days
91 days to 1 year
Over 1 year to 5 years
Over 5 years to 10 years
Over 10 years
Total

U.S.
Government
Securities
$

Federal
Agency
Obligations

231
4,580
6,969
6,187
2,547
3,302

$

—
2
1
—
6
—

$23,816

$

9

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

Total
$

231
4,582
6,970
6,187
2,553
3,302

$23,825

46
At December 31, 1999, and December 31, 1998, matched sale–purchase transactions
involving U.S. government securities with par values of $39,182 million and $20,927
million, respectively, were outstanding, of which $1,952 million and $952 million were
allocated to the Bank. Matched sale–purchase transactions are generally overnight
arrangements.
5. INVESTMENTS DENOMINATED IN FOREIGN CURRENCIES
The FRBNY, on behalf of the Reserve Banks, holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests in foreign
government debt instruments. Foreign government debt instruments held include both
securities bought outright and securities held under agreements to resell. These investments are guaranteed as to principal and interest by the foreign governments.
Each Reserve Bank is allocated a share of foreign-currency-denominated assets, the
related interest income, and realized and unrealized foreign currency gains and losses,
with the exception of unrealized gains and losses on F/X swaps and warehousing transactions. This allocation is based on the ratio of each Reserve Bank’s capital and surplus
to aggregate capital and surplus at the preceding December 31. The Bank’s allocated
share of investments denominated in foreign currencies was approximately 3.818 percent and 5.203 percent at December 31, 1999, and December 31, 1998, respectively.
The Bank’s allocated share of investments denominated in foreign currencies, valued
at current exchange rates at December 31, was as follows (in millions):
1999
German marks:
Foreign currency deposits
Government debt instruments
including agreements to resell

$

European Union euro:
Foreign currency deposits
Government debt instruments
including agreements to resell
Japanese yen:
Foreign currency deposits
Government debt instruments
including agreements to resell
Accrued interest
Total

$

—

1998
$

544

—

123

165

—

97

—

12

35

340
2

322
5

616

$ 1,029

Total investments denominated in foreign currencies were $16,140 million and
$19,769 million at December 31, 1999, and December 31, 1998, respectively. The
1998 balance includes $15 million in unearned interest collected on certain foreign currency holdings that is allocated solely to the FRBNY.

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

47
The maturities of investments denominated in foreign currencies that were allocated to
the Bank at December 31, 1999, were as follows (in millions):
Maturities of Investments Denominated
in Foreign Currencies
Within 1 year
Over 1 year to 5 years
Over 5 years to 10 years
Total

$

575
19
22

$

616

At December 31, 1999, and December 31, 1998, there were no open foreign exchange
contracts or outstanding F/X swaps.
At December 31, 1999, and December 31, 1998, the warehousing facility was $5,000
million, with nothing outstanding.
6. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment at December 31 is as follows (in millions):
1999
Bank premises and equipment:
Land
Buildings
Building machinery and equipment
Construction in progress
Furniture and equipment
Accumulated depreciation
Bank premises and equipment, net

$

32
116
26
1
80
255
(77)
$178

1998
$

$

32
115
24
2
77
250
(68)
182

Depreciation expense was $11 million for each of the years ended December 31, 1999,
and December 31, 1998.
7. COMMITMENTS AND CONTINGENCIES
At December 31, 1999, the Bank was obligated under noncancelable leases for premises and equipment with terms ranging from one to approximately five years. These
leases provide for increased rentals based upon increases in real estate taxes, operating
costs, or selected price indices.
Rental expense under operating leases for certain operating facilities, warehouses, and
data processing and office equipment (including taxes, insurance, and maintenance
when included in rent), net of sublease rentals, was $484,000 and $399,000 for the
years ended December 31, 1999, and December 31, 1998, respectively. Certain of the
Bank’s leases have options to renew.

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

48
Future minimum rental payments under noncancelable operating leases with terms of
one year or more at December 31, 1999, were as follows (in thousands):
Operating
2000
2001
2002
2003
2004
Thereafter
Total

$

365
357
357
78
7
—

$ 1,164

At December 31, 1999, there were no other commitments and long-term obligations
in excess of one year.
Under the Insurance Agreement of the Federal Reserve Banks dated March 2, 1999,
each of the Reserve Banks has agreed to bear, on a per-incident basis, a pro rata share
of losses in excess of 1 percent of the capital paid-in of the claiming Reserve Bank, up
to 50 percent of the total capital paid-in of all Reserve Banks. Losses are borne in the
ratio that a Reserve Bank’s capital paid-in bears to the total capital paid-in of all
Reserve Banks at the beginning of the calendar year in which the loss is shared. No
claims were outstanding under such agreement at December 31, 1999, or December
31, 1998.
The Bank is involved in certain legal actions and claims arising in the ordinary course
of business. Although it is difficult to predict the ultimate outcome of these actions, in
management’s opinion, based on discussions with counsel, the aforementioned litigation and claims will be resolved without material adverse effect on the financial position or results of operations of the Bank.
8. RETIREMENT AND THRIFT PLANS
Retirement Plans
The Bank currently offers two defined benefit retirement plans to its employees, based
on length of service and level of compensation. Substantially all of the Bank’s employees participate in the Retirement Plan for Employees of the Federal Reserve System
(“System Plan”) and the Benefit Equalization Retirement Plan (“BEP”). The System
Plan is a multi-employer plan with contributions fully funded by participating employers. No separate accounting is maintained of assets contributed by the participating
employers. The Bank’s projected benefit obligation and net pension costs for the BEP
at December 31, 1999, and December 31, 1998, and for the years then ended, are
not material.
Thrift Plan
Employees of the Bank may also participate in the defined contribution Thrift Plan for
Employees of the Federal Reserve System (“Thrift Plan”). The Bank’s Thrift Plan contributions totaled $3 million for each of the years ended December 31, 1999, and
December 31, 1998, respectively, and are reported as a component of “Salaries and
other benefits.”

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

49
9. POSTRETIREMENT BENEFITS
OTHER THAN PENSIONS AND POSTEMPLOYMENT BENEFITS
Postretirement Benefits Other Than Pensions
In addition to the Bank’s retirement plans, employees who have met certain age and
length-of-service requirements are eligible for both medical benefits and life insurance
coverage during retirement.
The Bank funds benefits payable under the medical and life insurance plans as due
and, accordingly, has no plan assets. Net postretirement benefit cost is actuarially determined, using a January 1 measurement date.
Following is a reconciliation of beginning and ending balances of the benefit obligation
(in millions):
1999
Accumulated postretirement benefit obligation at January 1 $36.7
Service cost—benefits earned during the period
1.3
Interest cost of accumulated benefit obligation
2.2
Actuarial loss (gain)
(6.6)
Contributions by plan participants
0.3
Benefits paid
(1.2)
Plan amendments, acquisitions,
foreign currency exchange rate changes,
business combinations, divestitures, curtailments,
settlements, special termination benefits
—
Accumulated postretirement benefit obligation
at December 31
$32.7

1998
$40.2
1.4
2.7
2.9
0.3
(1.2)

(9.6)
$36.7

Following is a reconciliation of the beginning and ending balance of the plan assets, the
unfunded postretirement benefit obligation, and the accrued postretirement benefit
cost (in millions):
1999

1998

Fair value of plan assets at January 1
Actual return on plan assets
Contributions by the employer
Contributions by plan participants
Benefits paid
Fair value of plan assets at December 31

$

—
—
0.9
0.3
(1.2)
$ —

$

Unfunded postretirement benefit obligation
Unrecognized prior service cost
Unrecognized net actuarial gain (loss)
Accrued postretirement benefit cost

$32.7
15.5
(3.1)
$45.1

$36.7
16.4
(9.9)
$43.2

—
—
0.9
0.3
(1.2)
$ —

Accrued postretirement benefit cost is reported as a component of “Accrued benefit cost.”

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

50
The weighted-average assumption used in developing the postretirement benefit obligation as of December 31, 1999, and December 31, 1998, was 7.5 percent and 6.25
percent, respectively.
For measurement purposes, an 8.75 percent annual rate of increase in the cost of covered health care benefits was assumed for 2000. Ultimately, the health care cost trend
rate is expected to decrease gradually to 5.5 percent by 2006, and remain at that level
thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported
for health care plans. A 1 percentage point change in assumed health care cost trend rates
would have the following effects for the year ended December 31, 1999 (in millions):
1 Percentage 1 Percentage
Point
Point
Increase
Decrease
Effect on aggregate of service and interest cost
components of net periodic postretirement
benefit cost
Effect on accumulated postretirement benefit
obligation

$

0.8

$ (0.6)

1.7

(1.6)

The following is a summary of the components of net periodic postretirement benefit
cost for the years ended December 31 (in millions):
1999
Service cost—benefits earned during the period
Interest cost of accumulated benefit obligation
Amortization of prior service cost
Recognized net actuarial loss
Net periodic postretirement benefit cost

$

1.3
2.2
(1.0)
0.3
$ 2.8

1998
$

1.4
2.7
(0.5)
0.1
$ 3.7

Net periodic postretirement benefit cost is reported as a component of “Salaries and other
benefits.”
POSTEMPLOYMENT BENEFITS
The Bank offers benefits to former or inactive employees. Postemployment benefit costs
are actuarially determined and include the cost of medical and dental insurance, survivor income, and disability benefits. Costs were projected using the same discount rate
and health care trend rates as were used for projecting postretirement costs. The accrued
postemployment benefit costs recognized by the Bank at December 31, 1999, and
December 31, 1998, were $6 million each year. This cost is included as a component of
“Accrued benefit cost.” Net periodic postemployment benefit costs included in 1999 and
1998 operating expenses were $1 million each year.

1999 ANNUAL REPORT Federal Reserve Bank of Dallas

51

Volume of Operations
(UNAUDITED)

Number of Items Handled
(Thousands)

Dollar Amount
(Millions)

1999

1998

1999

1998

Federal Reserve notes processed

2,126,309

1,697,447

30,649

27,380

Currency received from circulation

1,958,586

1,789,661

60,357

27,779

Coin received from circulation

1,720,739

1,512,784

150

139

1,256,859

1,204,449

741,096

705,416

Commercial–fine sorted

143,445

193,347

47,638

72,545

U.S. government checks

23,533

26,236

22,834

24,893

241,852

210,360

678,462

639,038

12,346

11,686

14,623,121

16,097,218

96

155

1,845,114

2,452,537

SERVICES TO DEPOSITORY INSTITUTIONS
CASH SERVICES

CHECK PROCESSING

Commercial–processed

ELECTRONIC PAYMENTS

Automated Clearinghouse items originated
Funds transfers processed
Book-entry security transfers processed

LOANS

Advances made

92*

59*

127

327

11

14

736

892

2,691

2,251

14

12

SERVICES TO THE U.S. TREASURY
AND GOVERNMENT AGENCIES

Issues and reinvestments of Treasury securities
Food coupons destroyed

*Individual loans, not in thousands.

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

52

About the Dallas Fed
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.
The Federal Reserve Bank of Dallas
has served the financial institutions in the
Eleventh District since 1914. The 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.

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
Kay Champagne, Publications Director
Monica Reeves, Editor
Patti Holland, Art Director
Laura Bell, Chart Designer
Gene Autry, Photographer

Federal Reserve Bank of Dallas 1999 ANNUAL REPORT

1999 ANNUAL REPORT Federal Reserve Bank of Dallas