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MONETARY
POLICY
TOR 1976APRIMER
1975 Annual Report
Federal Reserve Bank
of Minneapolis




MONETARY
POLICY
FOR 1976A PRIMER




1975 Annual Keport
Federal Reserve Bank
of Minneapolis

Table of Contents
I

I. Introduction ..........................
II. Historical Experience and the
Analytic Framework .............
ni. Prospectsfor 1976 .................

in

IV. Conclusions............................

15

I. Introduction
ow fast should money grow? The Fed recently has
been seeking to encourage, or accommodate, a
growth rate for the money supply that would average be­
tween 5 and IVi percent over the subsequent four-quarter
period. In this discussion, we shall attempt to explain the
case for th a t“ target” range. Our case will be built on a dis­
cussion of three related questions: First, how fast should
money be allowed or encouraged to grow over the longer
run? Second, what are the key economic relationships that
must hold if money growth is to do the desired job? Third,
what factors justify a departure from the longer-run path of
money growth at the moment?

H




1

It’s clear enough that in the final analysis our answer
to those questions will depend on how we believe the econ­
omy works and, particularly, how we believe it is influenced
by money. In the light of recent research, both theoretical
and applied, we have lost some of our earlier confidence in
our ability to pinpoint a “ best” target through refined
econometric analysis. Rather than attempting to resolve
conflicting theories about the role of money in our econ­
omy, we will discuss our questions within a framework that
is largely independent of beliefs about how the economy
“ really” works. This framework, which we discuss in Sec­
tion II, focuses on a few selected relationships which are
true by definition because of the particular bookkeeping
system used to record our economic life.
In Section III, this framework will be used, together
with observations about the recent and historical perfor­
mance of certain key economic variables (such as productiv­
ity and money velocity) and a consensus view of likely eco­
nomic performance in 1976, to show why it’s reasonable
under current circumstances to target growth of the money
supply in the range of 5 to IV 2 percent. We shall argue that
a key requirement necessary to validate this policy pre­
scription is that wage settlements in the aggregate not
exceed 9 percent. Average wage increases in excess of 8 to
9 percent would likely cause prices to rise more than
allowed for in this policy stance, and thus frustrate or re­
tard the momentum of economic recovery.
This discussion is intended only to illustrate analyti­
cally one way of looking at the relationships between money
and the performance of the economy. It is not intended to
represent predictions of what will actually happen. None­
theless, it serves to illustrate that the choice of a money
growth target not only implies some view of the possible
balance between rates of growth in real output and prices,
but also depends importantly on private sector decisions for
the particular outcome attained.




2

II. Historical Experience
and the Analytic Framework
he economy’s long-term rate of growth can be me­
chanically represented as the sum of two elements:
the rate at which real, physical output grows and the rate at
which the general price level rises. Since World War II, for
example, real output of goods and services as measured by
the Gross National Product (GNP) has increased at an
average rate of 3.7 percent per year, while the price level
implicit in GNP has increased at an average rate of 3.1
percent per year.* That means that dollar GNP, which is
the product of price and real output, has grown at the sum
of those two rates; namely, 6.8 percent per year on average.
A classical view in economics is that money ought to
increase roughly in line with the amount of activity that
needs to be financed in the economy. This view rests on the
reasonable proposition that real growth possibilities for the
economy ought to be fully accommodated. Assuming the
3.7 percent postwar annual growth rate for real GNP is a
measure of our economy’s long-term potential, then we
should want to see, on average, 3.7 percent annual money
growth merely to support the physical transactions needs of
the economy.
But it’s also true that we need to have some addi­
tional money growth to accommodate a normal upward drift
in the measured price level of 1 to 2 percent per year. This
upward drift is quite consistent with the notion of “ stable
prices” since general price indexes do not sort out all of the

T

♦The long-term growth rates used in this section are calculated from data
for the years 1947 and 1974 presented in the 1975 Economic Report of the Presi­
dent.




3

.generalprice indexes do not sort out all
of the quality improvements and innovations
occurring in a dynamic economy. . . ' '
‘




.

quality improvements and innovations occurring in a dy­
namic economy with its changing mix of output. Thus, a
measured creep of 1 to 2 percent a year in the general price
index is probably equivalent to zero inflation in a world
where technology is static. Assuming, on those grounds,
that we should be prepared to accommodate, say, a IV 2
percent per year price level growth, we would arrive at a
figure of about 5.2 percent a year (3.7 percent real plus 1.5
percent price) as the annual growth in the amount of
“ work” money has to do in the economy.
If a dollar of money didn’t vary in its ability to finance
economic transactions from year to year, then our answer to
the first question—how fast should money grow?—would
be simple: We should want to see the money supply expand
at a long-term average rate of about 5 percent a year in
order to accommodate normal real growth and price drift.
Much more than 5 percent would by this reasoning simply
result in undue inflation, while much less money growth
would cause undue deflation.
Having said that, we hasten to acknowledge that
money itself does indeed increase in efficiency over time,
and such changes represent a third element that we need
take into account in deciding on a long-term desired rate of
money supply growth. The efficiency of money (or the
“ velocity’’ of money), defined as the amount of GNP a
given dollar of money stock will support, has increased at
an average rate of about 3 percent per year over the post­
war period. If we could count on such a continuing trend in
efficiency of money, then our long-term “ target” rate for
money growth should be reduced by about 3 percentage
points, since each dollar would do about 3 percent more
work each year.
In short, the foregoing argument leads us to the con­
clusion that over the longer term, we should aim toward
money growth at an average rate of about 2Vi percent per
year. We can summarize these results for the long term as
follows:




{ tu p *
w rt* f
a,
&

/(V fe & * \
yuU°i ■

A 4 ffa * i,

z

K

&

i

ej 'hurr*^
-2.7 7,

/.r %

?.7 %

where we have used for our velocity projection the slightly
reduced 2.7 percent trend it appears to have been following
since 1960.
There’s obviously nothing very precise about the 2 Vi
percent rate we’ve described as a hypothetically preferred
target. The actual average money growth rate since World
War II has been a somewhat larger
percent rate. But
it’s not surprising that actual historical experience shows
money growth somewhat larger than that of classical pre­
scription—the difference reflecting some net inflationary
bias over the postwar period. Either figure, though, tells us
that however appropriate may be the Fed’s recent target of
5 to IVi percent money growth, sooner or later we shall
need to get back to a rate considerably lower.
There exist other well-defined relationships among
economic variables that lie behind those we’ve just talked
about. Consider first what contributes to growth in real out­
put. One approach is to identify three factors: the number
of workers, average hours per worker, and average real
output per hour of work. As any of these three items gets
larger, real output grows. On this reasoning, we can split
the rate of growth of real output into three elements as
follows:

f M* Y

/ fa&y
( <MVrCL
y ijM d
'3.1 %




i+
fjA/
—

/5 " %

6

owtvfd

The first element, growth in number of people em­
ployed, is pretty much determined (from a policy point of
view) by demographic trends in population and labor force.
That is, in order that unemployment not persist at rates
over its frictional minimum, the rate of employment growth
has got to nearly match the long-term growth in labor force.
For the postwar period the latter figure averaged a fairly
steady 1.5 percent per year. Hours per worker has trended
very slightly downward, and this factor by itself acts as an
offset to growth in real output. While changes in hours per
worker have only a relatively small impact on growth of out­
put over the long run, cyclical swings in hours worked can
make a substantial difference in output, plus and minus, in
the shorter run.
But as the above figures indicate, the mainspring of
real output growth is the change in output per hour or pro­
ductivity growth. The indicated 2.7 percent per year post­
war average annual gain in productivity may possibly be
close to the economy’s basic potential to expand its effi­
ciency.
Whatever the actual potential, it’s important to
understand the sources of productivity growth and what we
must do to keep productivity advancing. Obviously, that’s a
major topic in itself. For our present purposes, we’ll merely
observe that the gains are in a real sense caused by not only
social and private investment in education and training of
individuals, but also by the development and application of
new technology. The heavy involvement of the private sec­
tor in these “ progress-generating activities,” as they’ve
been called, means that profit prospects must continue to
appear attractive, or the necessary flow of new investment
will eventually dry up. This implies that there are some
definite and real limitations on wage settlements if the
economy is to operate without excessive inflation.
We can illustrate this point with one additional rela­
tionship that identifies the connection between unit labor
costs, wage rates, and productivity. Since prices and unit
labor costs (i.e., labor cost per unit of output) tend to rise at




7




the same rate, if the long-run policy objective is to keep
inflation at or below 2 percent, and if long-term productiv­
ity growth averages 2.7 percent per year, the average in­
crease in wage rates over time cannot exceed the sum of
those two:

I I *
1.7%

x.o %

Wage claims greater than this over the long run will simply
result in more rapid inflation, and/or reduced profit mar­
gins and profit’s share of GNP.
If growth in dollar wage rates averages 4.7 percent
per year, given the assumption of 2 percent inflation and a
decline in average hours per worker of 0.5 percent, growth
in real wage income (purchasing power) per worker will
average about 2.2 percent per year. Even though 2.2 per­
cent per year may not sound like much, it represents more
than a doubling of living standards during a normal work­
ing lifetime.
Thus, what ought to be done by way of supplying
money to the economy is heavily influenced by the capacity
of the economy to produce added real output. In turn, any
set of objectives for growth in real output and prices is very
much at the mercy of a consistent relationship between
pricing and wage bargain decisions.
We’ve talked in this section in terms of long historical
averages. But in trying to use long-term averages, we suf­
fer from the same disadvantage as the traveller who knows
that a stream he would like to cross is, on average, three
feet deep: we are hard pressed to know how to use such
information when faced with a specific crossing. On that
note, let’s see how we may apply the relationships dis­
cussed above to the situation the economy currently faces.




III. Prospects for 1976
t this writing the prospect for the economy over the
1 V next year appears to be one of continuing recovery
from recession. Let’s attempt to organize our thinking
about these prospects using the relationships discussed
earlier in which we identified three potential growth com­
ponents in the calculation of a money supply growth target:

6.07,

C>.0%

C.o7>
(,.07*

t.o j.

As the numbers above indicate, real growth for 1976
is likely to be about 6 percent, according to a consensus of
major forecasts published at this time. Reflected in the esti­
mate is a turnaround in the economy from last year’s 2 per­
cent decline. The forecasts also indicate that the rate of
inflation should diminish from last year’s 8.7 percent to
around 6 percent.
On the basis of those figures, the dollar value of
transactions the money supply would be required to accom­
modate in 1976 will rise by 12 percent. Our preferred mone­
tary growth rate would then be in the neighborhood of 12
percent, less the increase we expect in the efficiency of
money use (velocity). We’ve already indicated that velocity
has risen on average by about 3 percent per year over the
postwar period. However, money efficiency or velocity in­




10

creases more rapidly during business-cycle recoveries (just
as does labor productivity), and growth of around 6 percent
over a four-quarter span is quite characteristic. If anything,
the pickup in velocity during the current recovery phase
(beginning in spring of 1975) has been more rapid than
usual.
If we take the 6 percent figure as a reasonable expec­
tation for growth in money efficiency in 1976, we may sub­
tract that amount from our projected 12 percent increase in
work to be done by money and derive a figure of 6 percent
as the needed growth in the size of the money stock for the
year. Thus, the argument we’ve sketched ends up with a
number that falls within the 5 to IVi percent range an­
nounced by the Federal Reserve System.
The exercise outlined above is instructive and, per­
haps, a bit reassuring in that it indicates how the an­
nounced policy targets are consistent with the current out­
look. But the consensus forecasts of the various compo­
nents are obviously open to question and uncertainty. For
example:
(1) Can we depend on the 6 percent increase in money
efficiency we are forecasting? One thing we know is
that money efficiency is in part dependent upon the
level of interest rates: the higher are interest rates,
the greater the incentive to reduce idle cash bal­
ances, and the greater the efficiency with which the
money stock is used.
(2) Can we be sure that the inflation rate we’ve used in
our computation is the minimum consistent with ac­
ceptable growth in real output?
Causes for uncertainty in choosing a money growth
rate, of course, do not end there. There’s plenty of room for
differences of view about the rate of growth in real output.
As we noted earlier, three factors underlie growth in real
output projected for 1976 at a 6 percent rate: (a) employ­
ment is expected to increase at about a 2 percent rate in this
recovery (versus a long-run average of 1.5 percent)—




li

modestly faster than the anticipated labor force growth, so
that unemployment should decline gradually; (b) hours
worked per employee may grow by about 0.5 percent (ver­
sus a long-run decline of 0.5 percent) as recession-short­
ened workweeks are further restored; and (c) productivity
may grow by at least 3V2 percent (versus a long-run aver­
age of 2.7 percent) as the usual recovery-phase rise in pro­
ductivity takes place.
It’s the 3V2 percent figure forecast for productivity
growth that is key in determining what kind of wage settle­
ment pattern is consistent with stated monetary policy
objectives and gains in real income per worker. Productiv­
ity gains act as a direct offset to wage increases in terms of
the impact on unit labor costs.
Given our previous forecast figures, we can explore
the implications of any assumed rate of advance in average
wage rates for 1976. Let’s start with the proposition that
wages per hour will go up 9 percent, which is not out of line
with assumptions in many published forecasts. That means
unit labor costs would increase 5.5 percent as indicated by
our earlier formula:

We argued earlier that a particularly crucial matter is
the effect pricing and wage bargain decisions might have
on profit margins. Looking both ahead and to history, it
appears to be not merely a question of profits holding their
own as a share of national income, but of restoring profit’s
share from the reduced levels of recent years. Without
some recovery of profit shares over the next few years, the
private sector will not likely be willing to make the needed
investment to support future productivity gains.




12

Profits* and Employee Compensation
as a Percentage of Gross National Product
Percent

(1 9 4 7 -1 9 7 5 )

•before tax plus inventory valuation adjustment
tfirst 9 months
Source: Survey of Current B usiness

Profits tended to average around 10 percent of GNP
for at least a decade before 1969, hitting 11 percent in a
couple of years. But since 1970, profit’s share of GNP has
held at levels of 7 percent to 8 percent. For the first three
quarters of 1975, profit’s share of GNP was close to 7.5
percent.
In 1976, our calculations indicate that with a 9 per­
cent increase in wage rates, before-tax profits rise by about
16 percent, but profit’s share of GNP increases only slightly
from 7.5 percent in 1975 to 7.8 percent in 1976.* With the
same assumptions, real wage income per worker rises by
3.5 percent, or considerably more than the 2.2 percent
long-term sustainable average described in Section II.
Some observers see pressures for even higher wage
settlements, which might push the average to 10 or 11
percent. If we try an 11 percent wage increase in our calcu­




13

lations, other assumptions the same, profit’s share of GNP
would fall below 7 percent. The further erosion of profit
margins implied by this outcome would almost certainly
generate efforts on the part of business to raise prices
faster than the 6 percent increase assumed. For example, if
the price level could be raised enough to retain a profit mar­
gin of 7.8 percent, the inflation rate implied would then be
7.8 percent for 1976. Given a policy of money growth direct­
ed at accommodating no more than a 6 percent rate of price
increase, any higher rates of inflation would result either in
increased velocity (and higher interest rates) or slower
growth in real output and employment, or some combina­
tion of the two.

♦Price can be thought of as the sum of three components: labor cost per
unit, nonlabor cost per unit, and profit per unit (which is what’s left over). There­
fore, the rate of change in price can be written as a weighted sum of the rates of
change in these three factors where the weights are the fraction of the price attrib­
utable to each factor. In our aggregate calculations, the weights can also be inter­
preted as the factor’s share of total GNP. Thus, the basis for our calculations in this
section is the formula:

/m * i
fluw&
\rff/U C 6

where the numerical weights are the GNP shares of each factor during the first nine
months of 1975. Note that these shares will change from year to year depending on
the growth rates of each factor relative to the total inflation rate. We assume that
nonlabor costs will rise at the same rate as the general price level.




14

IV. Conclusions
he essence of the argument that we have tried to
make in the preceding pages is that 1976 holds the
potential for an economic recovery that could lay the
ground work for sustainable long-term growth of our econ­
omy. As indicated, the decline in the historical share of
profits in total income has impaired the prospects for ade­
quate growth in our “ progress-generating activities.”
Nineteen hundred and seventy six holds a reasonable pros­
pect for a small, but significant, turnaround in the profit
picture. Fortunately, it appears that a growing economy
can engineer this turnaround with a growth in real earnings
per person that is above its long-term sustainable trend.
The key element in this optimistic scenario is the
prudence of business and labor in their price and wage
decisions. If business attempts to recoup its profit share too
quickly with unreasonable price increases, the higher infla­
tion rate could abort the recovery at a premature stage.
Similarly, if labor demands at the bargaining table are
inconsistent with the inflation and unemployment rates
which are facts of life today, then the balance in our eco­
nomic recovery could be seriously fractured.
Finally, the case for a 5 to IV 2 percent target range
for the rate of growth in the money supply depends impor­
tantly upon the strong cyclical increases in efficiency ex­
pected in 1976. Both production efficiency, as reflected in
productivity, and money efficiency, as reflected in velocity,
are expected to increase this year at rates significantly
above their trend rates of growth. It is only the strong
growth in these factors during a cyclical upswing that per­
mits a wage increase as large as 9 percent to be accommo­
dated within even a 6 percent inflation rate.

T




13

Since the improvement in efficiency that typically
accompanies economic recoveries cannot be expected to
persist over the longer run, wage increases in the years
beyond 1976 will have to more closely approximate gains in
real productivity if we are to avoid continuing inflation.
Similarly, with the economy moving back toward its long­
term growth potential and the rate of inflation apparently
moderating, it may well be possible—indeed essential—to
reduce the targeted rate of growth of the money supply in
the quarters ahead without in any way strangling rates of
growth in output and real wages.




&
Bruce K. MacLaury
President

16

Federal Reserve Bank
o f Minneapolis
1975 in Review
Financial Statement
Directors and Officers




1975 in Review

This is the second year we are using our Annual Report to review the
year’s performance in terms of the objectives we said we wanted to achieve.
Experience with the objective-setting process has taught us to concentrate
at the Bank management level on a few significant accomplishments, which we re­
view here. As part of this process, we build a multilevel structure of subobjectives
in the various departments of the Bank which support these management level
priorities.
For 1975, we aimed at just five Bank Objectives. There was an implicit
sixth objective which may have been more important than those explicitly set forth:
the Budget Objective.
Bank management set a budget target for 1975 of keeping the increase in
total Bank expense to not more than 7.1 percent above total expense in 1974. Our
actual expense increase for the year was 5.3 percent. Salary and related personnel
expense, which was budgeted to increase 10.5 percent, in fact increased by 8.3 per­
cent. Total controllable expense, scheduled to rise by 11.7 percent, went up by only
8.1 percent.
Part of this accomplishment was fortuitous in that volume of operations did
not increase as much as expected, the rate of inflation subsided somewhat, and the
rate of personnel turnover was lower than normal. The results also reflect in good
part, however, consciously planned increases in productivity and reductions in
costs. For example, expenses in our largest operating function, the Check depart­
ment, were held to the 1974 level in the face of a 4 percent volume increase and
rising costs.
Reductions from overall budget projections were achieved despite the
unscheduled addition of a System Purchasing Service responsibility to our func­
tions, and unanticipated increases in retirement system and building maintenance
costs.
The five stated Bank Objectives for 1975 and a summary review of their
achievement are set forth below:

To develop five-year scenarios on the effects o f EFTS
(Electronic Funds Transfer System).
Subobjectives under this principal objective called for a study of potential
EFTS effects on this Bank, on Ninth District commercial banks and other financial




18

institutions, on various nonfinancial groups, and on regulatory and monetary policy
and procedures. The underlying purpose for developing this matrix of study proj­
ects was to make the Bank a source of long-range planning information on EFTS as
well as to prepare for its impact on Bank operations.
Although this objective is well on its way, it will not be completed until
early in 1976. A study of the Automated Clearinghouse is being written, and a
series of studies on both the in-Bank and the external effects of EFTS is under way.
Two task forces, one devoted to evaluating the internal effects of EFTS and the
other its external impact, are preparing papers on such aspects of EFTS as (1) its
historical development and its potential for the district and the nation, (2) defining
its current and future technology, (3) its current legal framework, (4) an analysis of
public and private participation in EFT, and (5) its possible competitive impact on
Minnesota banks and thrift institutions.

To improve internal Bank operations through further
implementation o f management planning, organiza­
tion and control.
This objective had a number of facets. We sought first to make a signifi­
cant contribution to the further development by the Federal Reserve System of a
new system of planning, accounting, controlling, and measuring performance in
the Reserve Banks. This system, based on management-by-objectives principles,
has been in development since 1973 and is known as PACS (Planning and Control
System).
Phase I of the PACS project (study and analysis) was completed in 1974,
and Phase II (planning and design) was completed by midyear, 1975. This Bank
furnished one member of the seven-person System task force that coordinated
development of Phase II, and members of our staff served on various study teams
that contributed to the development process. The president of this Bank, as chair­
man of the Conference of Presidents’ Committee on Management Systems, Bud­
gets, and Planning, was involved in evaluating Phase II and in launching the pro­
gram’s implementation phase (Phase III) which began late in 1975.
Although the PACS idea is not new to this Bank, the integration of our con­
cepts into the more broadly based and complex System-wide plan represents a
significant commitment of Bank resources. This integration began in 1975 with the
naming of an internal group to assess the impact of PACS on our operations, deter­
mine its budget and resource implications, and take responsibility for insuring that
all requirements anticipatory to implementation of the expense accounting and
reporting components of the system are met.
In addition to the development resources assigned to PACS, we were able
in 1975 to complete an on-line safekeeping records system and make progress in
establishing an on-line money data base capability.
Also in 1975 a set of internal performance indicators was developed, and
an evaluation was made of a productivity index produced by another Reserve Bank
to see if it can be adapted for use by this Bank.




19

To reinforce organizational strength through a pro­
gram o f identifying management personnel needs
and o f training and development programs.
Early in 1975, with assistance from a management consultant, senior man­
agement of the Bank undertook to assess the Bank’s organizational and personnel
needs for the next five years at the officer level. Development of a target organiza­
tional structure and assessment of possible alternatives for specific assignm ents
led to substantial changes in assigned officer responsibilities.
Special emphasis was placed on programs for minority awareness and for
supervisory and management training. In addition, previous training programs
were continued—some in-Bank and some outside—for improving banking, techni­
cal, and professional competence.
The Personnel department during 1975 introduced a new performance
evaluation plan, completed about 75 percent of the work required for a revised job
evaluation structure, and had partially completed a new salary administration pro­
gram which will be introduced early in 1976.
The goals of the affirmative action plan, achievement of which was in 1975
made primarily a departmental rather than a staff responsibility, were met for both
handicapped employees and for minorities and women with the exception that the
number of minorities in lower grades, although up almost a percentage point from
a year earlier, missed our minimum goal of 8 percent by .2 percent.
Still needed is a more structured approach to management development at
the nonofficial level, including more in-Bank rotation of assignments and greater
exposure of our personnel to the operations of other Reserve Banks and the Board
of Governors. A statement of objectives for such a rotation program was under way
at year end. The Personnel department is also in process of preparing a revised
training and educational plan for all Bank employees.
Also completed during the year were (1) a job enrichment project in the
Check department and (2) the transition to altered work schedules, including adop­
tion of staggered and flexible hours in several departments.

To make significant contributions to System positions
on bank market structure, capital adequacy, liquidity,
and liability management, and on tactics for mone­
tary policy implementation.
Two studies on Minnesota’s banking structure have been completed by our
Research department in 1975, although only one has been released thus far. A
study of banking markets and the relationship between structure, prices, and non­
price factors in rural banking was completed and will be published early in 1976. A
project involving contingency planning and testing of bank liquidity has also been
completed in draft form and is in the hands of selected banks for evaluation.
Comprehensive study of monetary policy implementation, involving both
members of our own staff and economic consultants from the University of Minne­




20

sota, was under way throughout the year and has already produced a substantial
number of study papers which are of significant interest to monetary policy theore­
ticians. A summary paper on the Federal Open Market Committee decision-making
process, with a critique and proposals for improvement, will be completed early in
1976.
The Research department also completed during the year a number of
other studies involving regional, national and international aspects of banking,
finance, banking regulation, energy resources, agriculture, employment, and a
variety of other economic subjects.

To make an educational impact on the region through
bankers' meetings, seminars, publications, a new
Bank film, teaching games, etc.
Four educational meetings with a total attendance of approximately 400
bank officers and directors were held in Montana and North Dakota during the
year, continuing a program begun in Minnesota in 1974. M eetings of bankers, law­
yers, retailers and others interested in the Equal Credit Opportunity and Fair
Credit Billing Acts were held in Helena, Montana, and Minneapolis for an esti­
mated 850 persons. A conference for approximately 125 bank examiners from all
bank regulatory agencies in the district and a seminar for about 235 instructors in
economics and money and banking were also part of our 1975 program.
Members of our board met approximately 185 member bankers at three
meetings in South Dakota as a part of our annual directors’ outdistrict field trip.
Three meetings on functional cost analysis were held for bankers, and a total of 108
member banks participated in the functional cost program. Four “ Short Courses in
Central Banking,” each lasting three and one-half days, attracted a total of 137
bankers to the Bank, and a number of smaller in-Bank meetings for educators,
bankers, and others were also held.
Bank representatives made upwards of 75 formal talks in and out of the
district, and officers made approximately 300 visits to member banks during the
year. Incidentally, we gained five state banks and one national bank as Federal
Reserve members in 1975.
A newly-developed film on the role of a Federal Reserve Bank was re­
leased at midyear and has been shown to more than 4,000 people in 136 showings.
At midyear an extensive historical exhibit of currency and coin was put on display
in the Bank where it can be viewed by visitors who tour our building, of whom there
were more than 10,000 in 1975. About 60,000 publications distributed during the
year were also part of our educational program.
A special 1975 project in the educational area was to contribute to the eco­
nomic development of native Americans in the district. Achievements in meeting
this objective included publishing a summary and analysis of the Indian Finance
Act, completion of a study on improving banking service on a North Dakota Indian
reservation, participation in a flow-of-funds study for a South Dakota reservation
(the results of which will be published by the Bank early in 1976), and completion of




21

a pilot project to improve the success potential of commercial recreation facilities
on district reservations.
In addition to these specific annual objectives for 1975, the Bank also has
established long-range, continuing Goals which, while subject to review and pos­
sible revision each year, are essentially an unchanging statement of this Bank’s
fundamental purposes and the reasons for its existence.
These Goals are:

□
□
□
□
□

To be an innovative component of the Federal Reserve System.
To make a significant contribution to the formulation and conduct of
monetary policy.
To foster the growth and development of the Ninth District.
To improve services to government, banking, and the public.
To promote the strength and viability o f the nation's financial insti­
tutions.

□

To develop a more effective work force and to provide leadership in
the corporate community.

□

To improve the efficiency of Bank operations.




22

Federal Reserve Bank o f Minneapolis
Financial Statement

Statement o f Condition
December 31

1975

1974

Gold Certificate Account....................................
Interdistrict Settlement Fund............................
Special Drawing Rights Certificate Account..
Federal Reserve Notes of Other
Federal Reserve B a n k s..................................
Other C a s h ............................................................
Loans to Member B a n k s....................................
Securities
Federal Agency Obligations.........................
U.S. Government Securities.........................

$ 205,489,000
302.139.000
10,000,000

$ 309,300,000

43.486.000
15.109.000
41.875.000

27,249,000
9.340.000
1.550.000

132.619.000
1,894,025,000

104,877,000
1,785,563,000

Total Securities ...............................................

2,026,644,000

1,890,440,000

Cash Items in Process of Collection.................
Bank Premises—N e t ...........................................
Other A s s e ts ..........................................................

498,571,000
32.399.000
33.044.000

424,918,000
33.965.000
24.791.000

Total A s s e t s .................................................

$3,208,756,000

$2,728,553,000

Federal Reserve Notes in Circulation.............
Deposits
Member Bank Reserve Accounts.................
U.S. Treasury—General A cco u n t...............
F o reig n ..............................................................
Other D ep o sits.................................................

$1,586,070,000

$1,412,036,000

707.687.000
367.412.000
6.302.000
5.246.000

682.133.000
128.634.000
6,670,000
11,246,000

Total Deposits .................................................

1,086,647,000

828,683,000

Deferred Availability Cash Item s.....................
Other L iabilities...................................................

458,747,000
25,106,000

418,687,000
25,685,000

Total Liabilities ...........................................

$3,156,570,000

$2,685,091,000

26.093.000
26.093.000

21.731.000
21.731.000

52,186,000
$3,208,756,000

43,462,000
$2,728,553,000

Assets
7,000,000

Liabilities

Capital Accounts
Capital Paid I n ......................................................
S u r p lu s...................................................................
Total Capital.................................................
Total Liabilities and Capital Accounts. . . .




Earnings and Expenses
For the Year E nded Decem ber 31

1974

1975

C urrent E a rn in gs
Interest on Loans to Member B a n k s.................
Interest on U.S. Government Securities
and Federal Agency O bligations...................
All Other Earnings............ ....................................

$

$

217,000

2,773,000

132,326,000
347,000

125,727,000
428,000

132,890,000

128,928,000

Salaries and Other B en efits................................
Postage and Expressage......................................
Real Estate Taxes .................................................
Furniture and Operating Equipment—Pur­
chases, Rentals, Depreciation, Maintenance
Depreciation—Bank Prem ises............................
Other Operating E xpenses..................................
Assessm ent for Expenses of
Board of G overnors..........................................
Federal Reserve C urrency..................................

13,171,000
2,702,000
1,796,000

12,161,000
2,610,000
1,564,000

1,950,000
1,566,000
3,212,000

1,858,000
1,566,000
2,821,000

818,000
715,000

967,000
1,076,000

Total Current E x p e n se s..............................
Expenses Reimbursable or Recoverable..

25,930,000
(1,317,000)

24,623,000
(1,183,000)

Net E x p en ses.................................................

24,613,000

23,440,000

C u rren t N e t E a rn in g s........................................

108,277,000

105,488,000

Payments to U.S. Treasury..................................
Dividends P aid .......................................................
Net Profit or (Loss).................................................

(97,610,000)
(1,387,000)
(4,918,000)

(100,438,000)
(1,262,000)
(1,705,000)

Total Current Earnings................................

C urrent E x p e n se s

Transferred to S u rp lu s................................
Surplus, January 1 .................................................
Surplus, December 3 1 ..........................................

Volume o f Operations

Number
1975

Loans to Member Banks
Currency Received and Verified
Coin Received and Counted
Checks Handled, Total
Collection Items Handled
Issues, Redemptions, Exchanges
of U.S. Government Securities
Securities Held in Safekeeping
Transfer of Funds
♦M inneapolis and H elena com bined.




4,362,000
21,731,000
$ 26,093,000

2,083,000
19,648,000
$ 21,731,000

Dollar Amount
1974

1975

1974

290
1,386
128 million 115 million
481 million 376 million
582 million 558 million
.7 million
.4 million

$690 million $2.0 billion
971 million 871 million
70 million
56 million
160 billion 152 billion
1.3 billion 2.6 billion

7.6 million
432,054
627,347

28.4 billion 18.7 billion
8.0 billion 6.3 billion
495 billion 455 billion

7.3 million
405,824
529,423




Directors o f the
Federal Reserve Bank o f Minneapolis

January 1, 1976

James P. McFarland, Chairman and Federal Reserve Agent
Stephen F. Keating, Deputy Chairman
Class A — Elected by M em ber Banks
Charles T. Undlin, President (1976)
First National Bank of the Black Hills
Rapid City, South Dakota
William E. Ryan, President (1977)
Citizens State Bank, Ontonagon, Michigan
John S. Rouzie, President (1978)
First National Bank, Bowman, North Dakota
Class B — E lected by M em ber Banks
Warren B. Jones, Secretary-Treasurer (1976)
Two Dot Land & Livestock Company, Harlowton, Montana
Donald P. Helgeson, Secretary-Treasurer (1977)
Jack Frost, Inc., St. Cloud, Minnesota
Russell G. Cleary, Chairman and President (1978)
G. Heileman Brewing Company, Inc., La Crosse, Wisconsin
Class C — Appointed by Board o f Governors
Howard R. Swearer, President (1976)
Carleton College, Northfield, Minnesota
Stephen F. Keating, Chairman (1977)
Honeywell, Inc., Minneapolis, Minnesota
James P. McFarland, Chairman (1978)
General Mills, Inc., Minneapolis, Minnesota
M em ber o f Federal A dvisory Council
George H. Dixon, Chairman and President
First National Bank, Minneapolis, Minnesota

Directors of the Flelena Branch
James C. Garlington, Chairman
Reginald M. Davies, Vice Chairman
A ppointed by Board o f Directors
F ederal R eserve Bank o f Minneapolis
John Reichel, President (1976)
First National Bank, Great Falls, Montana
George H. Selover, President and General Manager (1976)
Selover Buick-Jeep, Inc., Billings, Montana
Donald E. Olsson, President (1977)
Ronan State Bank, Ronan, Montana
A ppointed by Board o f Governors
James C. Garlington, Partner (1976)
Garlington, Lohn & Robinson, Missoula, Montana
Reginald M. Davies, Secretary-Treasurer (1977)
Davies Ranch Company, Chinook, Montana
Term expires Decem ber 31 o f indicated year




Officers of the
Federal Reserve Bank o f Minneapolis

February I, 1976

Bruce K. MacLaury, President
Clement A. Van Nice, First Vice President
Thomas E. Gainor, Senior Vice President
Roland D. Graham, Senior Vice President
John A. MacDonald, Senior Vice President
Melvin L. Burstein, Vice President and General Counsel
Frederick J. Cramer, Vice President
Leonard W. Fernelius, Vice President
Lester G. Gable, Vice President
Bruce J. Hedblom, Vice President
Douglas R. Hellweg, Vice President
Howard L. Knous, Vice President and General Auditor
David R. McDonald, Vice President
Clarence W. Nelson, Vice President
and Director of Research
Robert W. Worcester, Vice President
Sheldon L. Azine, Secretary and Assistant Counsel
Earl O. Beeth, Assistant Vice President
James U. Brooks, Assistant Vice President
Phil C. Gerber, Assistant Vice President
Gary P. Hanson, Assistant Vice President
Richard C. Heiber, Assistant General Auditor
William B. Holm, Assistant Vice President
Ronald E. Kaatz, Assistant Vice President
Michael J. Pint, Assistant Vice President
and Assistant Secretary
Ruth A. Reister, Assistant Vice President
and Assistant Counsel
Charles L. Shromoff, Assistant Vice President
Colleen K. Strand, Assistant Vice President
Richard B. Thomas, Assistant Vice President
Joseph R. Vogel, Chief Examiner

Officers of the Helena Branch
John D. Johnson, Vice President
Ronald O. Hostad, Assistant Vice President
Betty J. Lindstrom, Assistant Vice President







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