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Federal Reserve Bank of Minneapolis


Federal Reserve Bank of Minneapolis

1984 Annual Report

The Transition
to Low Inflation:
Progress and Pressures


President’s Message
The Transition
to Low Inflation:
Progress and Pressures


Statement of Condition


Earnings and Expenses






President’s Message

Recent annual reports of this Bank have
considered in some depth major issues related
to banking and economic policy. The 1984
Annual Report continues this tradition with
the essay “The Transition to Low Inflation:
Progress and Pressures!’ A basic thrust of the
essay is that the transition to low inflation has
been difficult and costly for certain sectors and
institutions—including some important to the
Ninth Federal Reserve District—despite the
healthy overall expansion of the economy
during the past two years. In view of these
problems, temporary assistance programs
designed to aid specif ic industries with the
adjustment to low inf lation may be appro­
priate. But such programs are merely intended
to smooth the transition process and are in no
sense adequate substitutes for the responsible
monetary and fiscal policies necessary for
sustained prosperity with low inflation.
Against the background of the considerable
progress made to date, we have the oppor­
tunity, if we act wisely, to achieve this

Gary H. Stem



The Transition
to Low Inflation:
Progress and Pressures

The United States seems to be in transition to a low inflation economy
that has the potential for serving as the basis for broad and enduring pros­
perity. However, our present circumstances and prospects, although favorable
in many respects, may be jeopardized in the long run by large federal budget
deficits. These deficits are fundamentally incompatible with price stability
over time and, moreover, add to the heavy costs already imposed on specific
sectors and institutions by the transition to low inflation. These sectoral costs
in turn are significant not only because of the immediate pain inflicted, but
also because they may lead to ill-conceived countermeasures that could
threaten progress in reducing inflation and, therefore, our establishment of
durable prosperity.
Any effort to deal effectively with these transition costs and to smooth the
route to permanently low inflation and sustained growth and prosperity, then,
must include prompt and credible action to reduce federal budget deficits.
Policies designed instead to assuage industries such as agriculture, mining or
manufacturing, if not carefully targeted and administered, risk compromising
the discipline essential to restoring price stability. Such policies may be appro­
priate, but caution must be exercised so that policies are selected that are
consistent with long-run economic efficiency considerations.
In aiding troubled sectors, market incentives can probably be best main­
tained by relying as much as possible on the private sector. Debt relief
programs, for example, should encourage case-by-case financial restructuring
between borrowers and lenders. To the extent that introduction of public fund­
ing is appropriate, it should be targeted to debtors who demonstrate progress
in restructuring their businesses and rehabilitating their finances. Moreover,
such programs are intended to deal only with transitional problems and, as
such, are premised on the expectation that the underlying problem—excessive
federal budget deficits—will be addressed effectively.

This essay begins with a review of the macroeconomic policies pursued
over the past several years and the performance of the economy in the wake
of these policies. The focus then shifts to a discussion of sectoral difficulties
encountered in the transition to low inflation, difficulties compounded by high
real interest rates and federal budget deficits. The essay’s final section proposes
policies that seem to us necessary for continued progress toward price stability
and economic growth.

TWo-Pronged Policy Approach
A two-pronged approach to macroeconomic policy has evolved over
roughly the past five years. In a sense, monetary policy has focused on reducing
the rate of inflation, while fiscal policy has been primed to stimulate economic
Against the background of the escalation of inflation in the 1978-81
period, Federal Reserve policy moved progressively to discipline the money
creation process. After exceeding its target ranges inl977,1978, andl979,
growth in the basic money supply (M l) was brought within target in 1980 and
was reduced further in 1981. Although growth of the money supply, Ml in
particular, was erratic in these years—partly because of shifts in the demand
for various assets as deregulation of the financial sector proceeded and as
expectations about future inflation and economic performance changed—
this overall slowing in money growth was critical to the subsequent reduction
in inflation.
At the same time, fiscal policy was moving in the opposite direction.
Substantial business and personal tax cuts were embodied in the Economic
Recovery Tax Act of 1981, with the express objective of stimulating and
fostering economic growth. Although subsequent budget actions (such as Tax
Equity and Fiscal Responsibility Act of 1982) reduced the budget stimulus
somewhat, the net effect was clearly expansionary. Unprecedented federal
budget deficits accompanied the package, because the tax reductions were
not matched by comparable restraint on federal spending. Given the Federal
Reserve s anti-inflationary stance, these deficits were not financed to any
meaningful extent by monetary policy. The resulting policy mix, then, was a
highly expansionary fiscal policy accompanied by continued restraint on the
monetary side.

Progress on Many Fronts
This policy mix has been accompanied by significant improvement in
economic performance. Indeed, in broad terms, the record of the U.S.

economy since the end of the 1981-82 recession has been exemplary. By
several yardsticks, the expansion in economic activity has rivaled or surpassed
previous postwar recoveries. And surprisingly, inflation has not moved up
appreciably, as it has in most postwar recoveries. This performance, especially
viewed against the backdrop of the subpar economic gains, high unemploy­
ment, and accelerating inflation of the 1970s, has raised hopes, and to some
extent expectations, that basic structural improvement in the economy is
under way that will provide the building blocks for sustained prosperity over
There are many positive aspects to the recovery to date. Over the past
two years, for example, growth in real GNP has averaged 6 percent, the
best performance since 1950-51, and the gain in industrial production has
exceeded this pace. Real disposable income, aided in part by the personal tax
cuts, has increased steadily throughout the expansion and, in addition, aggre­
gate employment has risen by more than 7 million, testifying to the marked
improvement in labor market conditions. Cyclically sensitive industries, like
automobiles and housing, have exhibited renewed vigor. As to capital invest­
ment, the strength in outlays since the onset of the economic expansion has
been considerable, ranking with the best in the postwar period. Indeed, real
capital spending —as measured by nonresidential fixed investment—has in­
creased at an annual rate of more than 15 percent since the fourth quarter of
1982. The increase has been rather broadly distributed, although the growth
in spending on equipment began earlier and has been more robust than
the pickup in spending for structures. Within the equipment category, the
increase in outlays for electronic systems, including computers and other
automation machinery, has been especially strong.
But these developments, welcome as they are, testify to only a part of
what has been accomplished over the past several years. Along with marked
improvement in economic activity has come significant progress in reducing
inflation (see Chart 1) and inflation expectations in our economy. Sharp
deceleration in price and wage pressures began in the 1981-82 recession, and
moderation in inflation has been extended as the recovery has proceeded.
This is without question a distinctly encouraging development. For our
economy to work well over a prolonged period, reasonably stable prices are a
Although there remains a considerable distance to go, progress toward
price stability has in several respects been remarkable. Despite the fact
that the business expansion is roughly two years old, prices and wages are
rising only slightly more rapidly now than they were at the bottom of the
recession. There are several reasons for this performance, including ample
supplies of energy, raw materials, and food. However, critical ingredients in
recent price developments have been the international economic situation
and the aforementioned discipline in monetary policy.

Chart 1 Changes in Prices, 1979-1984









TWelve month percent change
Source: U.S. Department of Labor, Bureau of Labor Statistics

Substantial competition from abroad has served to increase the
availability of numerous products in this country and has acted to restrain
inflationary pressures which might otherwise have built in the wage and
price determination process. Essentially, as the United States has become
more closely tied to the world economy, the productive capacity at our dis­
posal has expanded, in this case making the economy more resistant to
inflationary pressures. Some indication of this is provided by prices of raw
materials and wholesale prices more generally. At the wholesale level, prices
clearly have not increased as rapidly thus far in the expansion as is typical,
based on comparisons with previous business cycles. Hence, a buildup in
pressures early in the production or distribution process that ultimately may
be translated into higher prices confronting consumers and other end users
seems to be delayed and, perhaps, avoided altogether.
Moreover, the market discipline inherent in internationalization and
growing worldwide economic interdependence has contributed to the moder­
ation which has characterized major collective bargaining agreements—and
wage increases more generally—over the past two years. Excluding potential
gains under cost-of-living clauses, increases in major collective bargaining
settlements in 1984 averaged 2.3 percent, the third consecutive year such
agreements were less than 4 percent.
There are other indicators favorable to lasting moderation in wage
and price pressures. Beyond developments at the wholesale level, it is clear


that unit labor costs are turning in a much more favorable performance than
is normal in a recovery. Indeed, since the trough of the business recession,
unit labor costs have increased only about 1.7 percent. Impressively, the
recent performance of unit labor costs cannot be attributed to unusual
increases in labor productivity. Productivity, in fact, has risen no more than
average thus far in the business cycle. Rather, the relative stability in unit
labor costs stems largely from moderation in wage and benefit increases, which
have climbed at about a 4 percent annual pace since the recovery began.
This moderation is atypical for business cycle expansions and is particularly
heartening when compared to the large nominal increases in compensation
that characterized much of the 1970s.

Transition to Low Inflation
With appropriately disciplined public policies, the recent progress in
reducing inflation can be solidified and extended. The pattern of recent wage
settlements, for example, suggests growing confidence in the probable success
of policies designed to achieve low inflation. Because inflation has been
lowered in a consistent and systematic way over the past several years,
attitudes and expectations are now starting to work for us in restraining cost
and price pressures.
Moderate increases in wages might well be accompanied by favorable
developments in the second major component of labor costs—namely, produc­
tivity. Admittedly, the productivity outlook remains uncertain, in part because
to this point in the cycle there is little if any evidence suggesting better than
normal productivity gains. However, two identifiable factors may boost
productivity: one is the aforementioned substantial increase in capital
spending, particularly for technologically sophisticated equipment; the other
is demographics.
With the maturing of the postwar baby generation, the labor market in
this country may have cleared several critical hurdles. In the 1970s, the baby
boom contributed to an enormous influx of new workers, an influx that at
least in relative terms was inexperienced, loosely attached to the labor force,
and to some extent unskilled. As these workers have gained skills and job
attachment, their productivity has naturally increased. Moreover, since the
baby boom was followed by a “baby bust” the economy does not face the
prospect of absorbing a bulge of this type of labor in the 1980s. Hence, with
the absorption substantially behind us, productivity may improve on a more
consistent basis. Between 1953 and 1973, labor productivity increased 2.7
percent annually in this country. But between 1973 and 1982, this trend
faltered, averaging less than 1 percent per year. While a return to the kind of
increases experienced in the twenty years following 1953 may not occur,


some perceptible improvement in productivity does not seem unreasonable
at this point.
Despite these positive factors, we cannot be complacent about our
economic prospects or about the public policy challenges we face. Indeed, it
is increasingly recognized that some sectors of the economy, here and abroad,
have participated little, if at all, in the recovery to date. These sectors generally
are not suffering from depressed sales volume, for in virtually all cases the
increases in their output and/or sales in this recovery compare favorably with
their performance in previous postwar expansions. Even in the mining and
farm equipment sectors —two industries hit hard by the recession—produc­
tion has improved significantly relative to its recession trough.
Comparisons of this nature imply that lagging output is not the problem
in many of these industries. This view is reinforced by the fact that around the
world industries, financial intermediaries, and, indeed, countries continue to
face serious financial problems, even though their lot should have improved
materially with the pickup in economic activity worldwide. One factor that
most, if not all, of these institutions and organizations have in common is that
to a degree they counted on a continuation of high inflation to validate invest­
ment decisions, lending policies, or growth strategies. As inflation diminished
and subsequently remained modest, this validation did not occur, thereby
contributing to their woes. The ongoing financial problems of many develop­
ing countries can be traced, for example, to their dependence on commodity
exports—metals or agricultural products—where prices have held steady or
have fallen in recent years.
The implication of this argument is not that the reduction in inflation
that has been achieved was ill-advised or that, in any event, inflation ought
now be permitted to rise. The inability of an advanced industrialized economy
such as ours to function well in an inflationary environment has been docu­
mented and demonstrated by the experience of the 1970s and early 1980s, so
that this alternative offers no promise at all. The implication, rather, is that
the transition—the adjustment—to low inflation was bound to be difficult
and costly for those participants who did not expect it and did not act accord­
ingly. This statement holds for those investors or enterprises who counted on
constant appreciation of land and real estate values or of prices of oil and
other raw materials, and for those who financed such plans and investments.
In these instances, however, the difficulties in the ongoing transition to
low inflation have been exacerbated by the exceedingly high levels of real
interest rates (i.e., inflation adjusted) that have characterized the recovery
(see Chart 2). These high real rates constitute substantial burdens to borrowers,
particularly in sectors like agriculture and energy where product prices have
not kept pace in recent years with the overall price level, so that the real rates
confronted by producers in these sectors have been exceedingly high (see, for
example, Chart 3). The debt situation has been further strained in those cases
where the value of the underlying asset has decreased so that the loan cannot

Chart 2 Inflation Adjusted Interest Rate
for the U.S. Economy, 1970-1984
-1 0
-1 5















Difference between four quarter moving average in the three month Treasury bill rate and the four quarter
percent change in the gross national product (GNP) implicit price deflator.
Source: U.S. Department of Treasury and U.S. Department of Commerce, Bureau of Economic Analysis

Chart 3 Inflation Adjusted Interest Rate
for the Petroleum Refining Sector, 1981-1984






Difference between four quarter moving average in the three month Treasury bill rate and the four quarter
percent change in the producer price index for refined petroleum products.
Source: U.S. Department of Treasury and U.S. Department of Labor, Bureau of Labor Statistics


be retired by the sale of the asset. Lenders on the other side of these trans­
actions are not necessarily in a significantly better position, for they may hold
financial assets of questionable value. In such cases, obtaining the underlying
real asset through foreclosure will not prevent significant loan losses for the
financial institution.

Ramifications of High Real Rates
As the economic recovery has proceeded and as inflation has remained
subdued, the costs associated with these high real interest rates are becoming
increasingly difficult to accept. Such rates are imposing high costs on specific
sectors of the economy, costs which are related to, but which go beyond, the
financial implications already discussed.
Specifically, these interest rates have contributed to the persistent
strength of the dollar relative to other major currencies throughout the world.
The linkage would seem to be rather direct, in that investment returns have
been attractive in this country relative to the rest of the world, particularly as
inflation has remained moderate. To be sure, domestic interest rates have not
been the only factor responsible for the ongoing strength of the dollar. Political
stability and commitment to capitalism—ingredients in the so-called safe
haven phenomenon—have served to bolster the dollar, as have the relatively
robust pace of our domestic economic expansion, the attendant growth in
profits and, equally important, the opportunities for profit.
The shift into dollar denominated assets was inevitable, given the scale
of the foreign trade and current account deficits the United States has run
over the past two years (see Table 1). Between 1977 and 1982, the U.S.
merchandise trade deficit generally remained between $25 billion and
$37 billion per year, or roughly 1 percent of GNP. But the trade deficit in 1983
exceeded $60 billion, and in 1984 it topped $100 billion—nearly 3 percent
of GNP. Our current account balance—a broader measure of international
transactions which, in addition to the trade figures, includes investment
income, military transactions, and certain transfer payments and U.S. govern­
ment grants—depicts this situation even more graphically. Between 1977
and 1982, the cumulative U.S. deficit on current account was about $32
billion. But in 1983 alone, this deficit came to more than $40 billion, and in
1984 it totaled about $100 billion.
Several factors have contributed to this trade and current account
performance. The strength of the economic expansion here, compared to that
under way in many of the other industrialized countries of the world, has
been a significant factor because demands for goods and services have grown
appreciably more rapidly here than abroad. Then, too, the financial straits
faced by several large developing countries —countries that in the past have


Tkble 1 U.S. TVade and Current Account Balances as a
Percent of Gross National Product (GNP), 1977-1984

($ Bil.)

as Percent

($ Bil.)

as Percent

— 31.1
- 3 4 .0
- 2 7 .6
-2 5 .5
- 2 8 .0
-3 6 .5
-6 1 .1


— 14.5
-1 5 .4
- 1 .0
- 9 .2
-4 1 .6


Source: U.S. Department of Commerce, Bureau of Economic Analysis

represented important markets for U.S. exports—have led to curtailment of
their ability to import, thereby depressing our exports.
But, undeniably, the persistent strength of the dollar relative to other
major currencies has been a prime factor in our trade performance. The rise
of the dollar has meant that goods produced here have become increasingly
expensive in terms of foreign currencies, while goods produced abroad have
become increasingly inexpensive in terms of dollars. Taken all together —our
strong domestic recovery, the financial problems of developing countries, and
the strength of the dollar—the result is trade and current account imbalances
of unprecedented proportions (see Chart 4).
The impact of this situation on our economy should not be underesti­
mated. Sectors that have faced this foreign competition directly or indirectly,
or that traditionally have relied on an ability to export for revenues and
profits, have encountered serious difficulties even as the recovery has pro­
ceeded. As previously noted, this has been more a problem of price than of
volume. Whatever the source, these problems at times spread beyond the
specific industries in question because of the consequences for their suppliers
and communities. Further, to the extent that problems spill over into our
financial institutions, as they clearly do when borrowers are unable to meet
their commitments and obligations, they can have ramifications that trans­
cend industrial or geographic boundaries. This is because the worldwide
financial community is so tightly knit that a problem in one major institution
or with one large debtor potentially can be transmitted to other institutions
in very short order.


Chart 4 Exchange Value of the U.S. Dollar
and U.S. Merchandise TVade Balance, 1970-1984

Source: U.S. Department of Commerce, Bureau of Economic Analysis, and Board of Governors of the
Federal Reserve System

The Role of the Deficit
The financial and foreign trade aspects of high real interest rates, then,
have exacerbated the difficulties associated with the adjustment to low infla­
tion. In turn, these real rates can be traced in part, through a number of
channels, to the federal budgetary situation. The origins and magnitude of
these budget deficits, as well as the frustrations encountered in trying to come
to grips with them, are by now well known and will not be repeated here.
Suffice it to say that deficits in the neighborhood of $200 billion or more
annually loom for the balance of the decade, given current federal spending
and tax policies. Even with reasonably optimistic assumptions about economic
growth over this period, it has become increasingly clear that these deficits
will persist unless overt policy action is taken to deal with them.
In a direct way, the deficits require sizable, ongoing borrowing by the
Treasury, thereby adding materially to overall demands for credit in an en­
vironment in which the private sector is bidding vigorously for funds as well.
Taken by itself, this situation suggests a high real interest rate environment.
Less directly, budget deficits of the magnitude now in prospect also raise the
spectre of a potentially significant reacceleration of inflation at some point in
the future. This concern is particularly acute if unbridled government bor­
rowing results in a more accommodative monetary policy than the Federal


Reserve prefers or the economy needs. Thus, both because of concerns about
future inflation and because of pressing current demands for financing, the
deficits are a material factor—although certainly not the only factor—
contributing to prevailing interest rate levels.
To the extent that these interest rates have helped to attract capital from
abroad and to strengthen the dollar, financing the deficit to this point has not
been as difficult as it might have been. But, in view of the magnitude of our
present current account deficit and taking a hard look at our international
prospects, it seems likely that the United States could soon become the largest
debtor country in the world. This observation need not automatically trigger
alarm, but in an environment in which real interest rate levels exceed our
economy’s ability to grow, servicing this debt and managing the federal deficit
situation will prove increasingly burdensome.

Policy Prescriptions
In our judgment, the current state of affairs—characterized by high
federal budget and foreign trade deficits —imposes disproportionate costs on
some sectors and institutions in the economy and is not sustainable in the long
run. This situation is not sustainable because the costs associated with these
deficits are mounting, threatening at some point to trigger actions which
could jeopardize progress in reducing inflation and in maintaining growth
and prosperity. For example, pressure to reduce high real interest rates pre­
sumably could be alleviated by excessive monetary expansion, but such
action would lead to a reacceleration of inflation, in the process sacrificing
one of the principal objectives of public policy.
Similarly, the imbalance in our international accounts could provoke a
widespread protectionist reaction in this country. Pervasive protectionist
measures curtail the access of foreign goods to our markets, thereby distorting
resource allocation and contributing to higher prices. Both directly, by reduc­
ing capacity and sources of supply, and indirectly, by the signal that would at
least implicitly be sent to domestic producers, protectionism would raise the
spectre of more inflation. Moreover, it is questionable whether any benefit
would result from protectionism. One reaction to broad based protectionist
policies here could be a hardening of trade restrictions abroad, so that our
export industries would encounter even tougher sledding in world markets.
Financing the federal budget deficit could also prove increasingly difficult
over time, particularly if there is a change in economic policies abroad.
Domestic deficit finance has been aided by significant capital inflows, but if
foreign countries act to curtail these flows—through, say, more expansionary
fiscal policies of their own and higher interest rates—increases in rates could
be required here to attract the funds necessary to cover the budget gap.


Higher rates, of course, would weaken the expansion as interest sensitive
sectors of our economy slowed. At least from the perspective of aggregate
activity, crowding out has largely been avoided thus far in the recovery, but
this problem could become far more serious if dependence on foreign capital
continues and attitudes and policies abroad change.
Even if these international considerations are ignored, the federal budget
deficit poses a distinct threat to progress toward reasonable price stability. An
overly stimulative fiscal policy sooner or later runs the risk of triggering a
reacceleration of price increases because it may contribute to a buildup of
demand which outstrips the growth over time in capacity and supply. As
noted earlier, this danger is particularly grave if, as a result of large and per­
sistent budget deficits and the interest rate levels they help to engender,
monetary policy is maneuvered into a more accommodative posture than it
would otherwise adopt.
Any effort, then, to construct and implement policies that will contribute
to sustainable growth with low inflation must include meaningful reductions
in prospective federal deficits. Such reductions should contribute to more
reasonable levels of real interest rates, which in turn would ease financial
pressures on economic sectors here and abroad. The threat of crowding out
in our domestic economy should diminish. And while it is by no means certain
that our international competitive situation would improve, if the dollar were
to decline modestly relative to other major currencies as a consequence of
lower real interest rates, our foreign trade position could in fact be bolstered.
Implicit in the earlier discussion is a second key ingredient in helping to
assure progress toward price stability—namely, continued discipline in the
conduct of monetary policy. Absence of such discipline, or even signs that the
Federal Reserve’s commitment and resolve were wavering, could appreciably
disrupt, if not compromise altogether, the effort to achieve enduring prosperity.
Even if these macroeconomic policies are pursued, it will obviously
require time for deficit reduction to be implemented and to take effect. In the
interim, many of the problems associated with high interest rates are likely to
persist, especially for those sectors of the economy experiencing difficulty in
making the transition to a low inflation environment. The question then
arises whether it is appropriate to provide limited assistance to targeted
sectors of the economy or to specific industries. Such limited assistance
programs might be considered on the basis of either equity or efficiency: if,
for example, previous government policies contributed, perhaps inadvertently,
to the problems these sectors are now experiencing; if potentially disorderly
or chaotic sectoral adjustments raise concerns about systemic instability;
or if alternative policy prescriptions threaten to impose even higher costs on
the overall economy.
While there thus may be a role for policies or programs which provide
assistance to particular sectors, such programs need to be designed and
administered with a good deal of caution and careful judgment. The agri

Chart 5 Inflation Adjusted Interest Rate
for the Farm Sector, 1981-1984

-1 0

-1 5





Difference between four quarter moving average in the three m onth Treasury bill rate and the four
quarter percent change in the producer price index for farm products.
Source: U.S. Department of Treasury and U.S. Department of Labor, Bureau of Labor Statistics

cultural sector of our economy provides a case in point. The transition to low
inflation and the consequences of high real interest rates have hit this sector
with particular force (see Chart 5). The decline in inflation has meant that
expectations of upward trends in crop and livestock prices and of everescalating land values have not been realized. As a result, producers who
acted on these assumptions have encountered mounting strains. In many
regions, income from farming has been low and land prices have been falling.
High real interest rates have meant that those with large debt burdens have
experienced continuing difficulty in servicing this debt. Moreover, with the
strong dollar, agricultural exports have been hindered and imported products
have been attracted.
If the adjustment problems in agriculture, or in some other sector, are to
be addressed with a series of targeted policies and programs, steps should be
taken to minimize distortions to incentives and hence to resource allocation.
Insofar as possible, reliance should be placed on the private sector, and caseby-case debt restructuring between borrower and lender should be encour­
aged. In this effort, there may be a place for private or public “seed money” but
the remedial process must respond to and reward those debtors who demon­
strate progress in putting their financial affairs in order. Moreover, in view of
the overall federal budget deficit situation, it would seem advisable that there


be no aggregate increase in aid but rather a redirection or reorientation of
These considerations imply that any government program to assist agri­
culture must be limited in scope, magnitude, and duration, so that the private
sector continues to function effectively, and the preponderance of the neces­
sary changes in resource allocation still take place. Therefore, interest rate
subsidies to farmers—a program that is functioning indirectly at the federal
level and directly in at least one state—should be available only to those who
meet strict eligibility requirements. Otherwise, attractive interest rates could
draw additional resources into agriculture, a result that clearly is incompat­
ible with prevailing conditions in the sector. Further, aid should be directed
insofar as practicable to producers who could at least break even at more
normal levels of real interest rates. While perhaps difficult to implement, this
recommendation follows from concern about the precedent of saving those—
in any sector—who grossly misjudge future trends in product prices and asset
values. For those in this situation with little prospect of regaining profitability,
retraining and relocation assistance may be better solutions.
Obviously, assistance programs should not add to the severity of the
problems they are intended to address. One of the objections to the numerous
debt moratorium proposals advanced at the state level is that they could keep
unprofitable ventures going, leading over time to further erosion in owners
equity. As a consequence, if and as liquidation becomes unavoidable, the
owner will obtain less than would have been the case in the absence of the
moratorium. And programs clearly should not substantially counter the basic
objectives of public policy. Higher price supports for agricultural products
might in some sense solve the immediate problem, but at the cost of greater
federal outlays, of higher domestic prices, of a less internationally competitive
agricultural sector, and of ongoing resource misallocation. Such costs appear
to be far too high. Further, assistance programs, as a general rule, should have
well-defined sunset provisions since transitional, not permanent, assistance
is the intent.
Whatever may be done along these lines, targeted policies will be unsuc­
cessful unless there is sustained economic growth here and abroad. This
observation reemphasizes the point that transitional policies are intended
only to facilitate the adjustment process and are premised on the assumption
that the underlying problem—in this case excessive federal deficits—will be
addressed in a concrete and credible way.






Federal Reserve Bank of Minneapolis

Statement of Condition
Earnings and Expenses


Statement of Condition (in thousands)
December 31,

December 31,


Gold Certificate Account
Interdistrict Settlement Fund
Special Drawing Rights Certificate
Loans to Depository Institutions
Federal Agency Obligations
U.S. Government Securities

$ 160,000

$ 143,000













Federal Reserve Notes1
Depository Institutions
Other Deposits





Total Deposits

$ 461,421

$ 402,381

Deferred Availability
Other Liabilities



Total Liabilities





Total Securities
Cash Items in Process of Collection
Bank Premises and Equipment —
Less: Depreciation of $18,496
and $15,322
Foreign Currencies
Other Assets
Total Assets

Capital Accounts

Capital Paid In
Total Capital Accounts
Total Liabilities and Capital Accounts


$ 108,608

$ 101,042



A m ou n t is net of notes held by the Bank: $520 million in 1984; and $504 million in 1983.



Earnings and Expenses (in thousands)
For the Year Ended December 31



Current Earnings

Interest on Loans to Depository Institutions
Interest on U.S. Government Securities and
Federal Agency Obligations
Earnings on Foreign Currency
Revenue from Priced Services
All Other Earnings
Total Current Earnings









$ 25,023

$ 23,642



$ 60,539

$ 55,218

Current Expenses

Salaries and Other Personnel Expenses
Retirement and Other Benefits
Postage and Shipping
Materials and Supplies
Real Estate Taxes
Depreciation —Bank Premises
Furniture and Operating Equipment —
Depreciation and Miscellaneous Purchases
Repairs and Maintenance
Cost of Earnings Credits
Other Operating Expenses
Net Shared Costs Received from Other FR Banks
Net Expenses
Current Net Earnings

Net Deductions3
Assessment by Board of Governors:
Board Expenditures
Federal Reserve Currency Costs
Dividends Paid
Payments to U.S. Treasury
Transferred to Surplus



Reimbursed Expenses2

$ 57,819

$ 52,696









Surplus Account

Surplus, January 1
Transferred to Surplus —as above

$ 50,521

$ 48,984

Surplus, December 31

$ 54,304

$ 50,521

R eim bu rsem ents received from the U.S. Treasury and other federal agencies.
3This item mainly consists of unrealized nut losses related to revaluation
of assets denom inated in foreign currencies to market exchange rates.


D ire c to rs

Federal Reserve Bank of Minneapolis

William G. Phillips
Chairman and Federal Reserve Agent

December 31,1984

John B. Davis, Jr.
Deputy Chairman

Class A Elected by Member Banks
Term Expires December 31
Dale W Fern
Chairman and President, First National Bank, Baldwin, Wisconsin 1984
Curtis W Kuehn
President, First National Bank, Sioux Falls, South Dakota
Burton P. Allen, Jr.
President, First National Bank, Milaca, Minnesota
Class B Elected by M ember Banks
William L. Mathers
President, Mathers Land Company, Inc., Miles City, Montana
Richard L. Falconer
District Manager, Northwestern Bell, Bismarck, North Dakota
Harold F. Zigmund
Retired Chairman, Blandin Paper Company, Grand Rapids, Minnesota


Class C Appointed by Board of Governors
William G. Phillips
Chairman, International Multifoods, Minneapolis, Minnesota
Sister Generose Gervais
Executive Director, Saint Marys Hospital, Rochester, Minnesota
John B. Davis, Jr.
Interim Executive Director, Children’s Theatre Company and School,
Minneapolis, Minnesota


M em ber o f Federal Advisory Council
E. Peter Gillette, Jr.
Vice Chairman, Norwest Corporation, Minneapolis, Minnesota



Helena Branch

Ernest B. Corrick

Gene J. Etchart
Vice Chairman

Appointed by Board of Directors FRB of Minneapolis
Harry W Newlon
President, First National Bank, Bozeman, Montana
Seabrook Pates
President, Midland Implement Company, Inc., Billings, Montana
Roger H. Ulrich
President, First State Bank, Malta, Montana
Appointed by Board of Governors
Ernest B. Corrick
Vice President and General Manager, Champion International Corporation,
Timberlands-Rocky Mountain Operations, Milltown, Montana
Gene J. Etchart
Past President, Hinsdale Livestock Company, Glasgow, Montana





Federal Reserve Bank of Minneapolis

December 31,1984

E. Gerald Corrigan


Thomas E. Gainor

First Vice President

Melvin L. Burstein
Leonard W Femelius
Gary H. Stem

Senior Vice President and General Counsel
Senior Vice President
Senior Vice President and Director o f Research

Sheldon L. Azine
Lester G. Gable
Phil C. Gerber
Bruce J. Hedblom
Douglas R. Hellweg
Ronald E. Kaatz
David R. McDonald
Preston J. Miller
Clarence W Nelson
Arthur J. Rolnick
Charles L. Shromoff
Colleen K. Strand
Theodore E. Umhoefer, Jr.

Vice President and Deputy General Counsel
Vice President
Vice President
Vice President
Vice President
Vice President
Vice President
Monetary Adviser
Vice President and Economic Adviser
Vice President and Deputy Director o f Research
General Auditor
Vice President
Vice President

Kathleen J. Balkman
John H. Boyd
Robert C. Brandt
James U. Brooks
Marilyn L. Brown
Evelyn F. Carroll
Richard K. Einan

Assistant Vice President and Secretary
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant General Auditor
Assistant Vice President
Assistant Vice President and
Community Affairs Officer
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Chief Examiner
Assistant Vice President

Jean C. Garrick
Caryl W Hayward
William B. Holm
Ronald O. Hostad
Bruce H. Johnson
Thomas E. Kleinschmit
Richard L. Kuxhausen
Roderick A. Long
James M. Lyon
Susan J. Manchester
Richard W Puttin
Thomas M. Supel
Kenneth C. Theisen
Thomas H. Turner
Carolyn A. Verret
Joseph R. Vogel
William G. Wurster

Helena Branch

Robert F. McNellis

Vice President and Manager