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THE OPENING YEAR Federal Reserve Bank of Minneapolis A nnual Report 1973 THE OPENING YEAR Federal Reserve Bank of Minneapolis A nnual Report 1973 The Fifes and Drums of Old Fort Snelling are a proud adornment for this annual report and they were a colorful part of the dedication of our new plaza last August. But more than that, historically, they symbolize the opening of the Upper Midwest to a dramatically changed commerce, economy and way of life. Continued change is a feature of the Upper Mid west, and it is "c h a n g e " on which we focused attention dur ing the opening year of the new Federal Reserve Bank building. The Bank was proud to sponsor and participate in discussions that relate vitally to Upper Midwest life: finan cial services —recent changes, needed changes; planning the region's future; regional economic policy; the world per spective for our problems and hopes. In the midst of all of this, we moved to a new build ing that many of you have seen and we hope more of you will see. To those of you who joined with us in marking this special year —thanks, it was a good beginning. But these important issues deserve wider attention and concern. We hope that the highlights of conferences included in this report, and the related proceedings publications that are available, will stimulate a continuing dialogue. District bankers to u rin g new facilities Opening the New Bank The largest move of valuables ever conducted in the Upper Midwest started at 2:00 a.m. on Saturday, July 28. On that morning the Federal Reserve Bank of Minneapolis began its move to new quarters at 250 Marquette Avenue. Valuables, including currency, coin and securities totaling nearly five billion dollars were moved first. Nearly all valuables were in place by 6:30 a.m. except part of the coin supplies that contin ued to be moved throughout the morning. Spring Valley Tribune, 7/30/73 "It's exciting to occupy a unique new building —the world's first com pletely 'suspended' office structure. It's a remarkable identification for the Federal Reserve Bank of Minneapolis. But the Minneapolis Fed is a lot more than just our new building —you and I are the ones who make this structure a living reality. As the Fed enters a new era, we will be the ones who assure our reputation of service to the Upper Midwest community." B ruce K. M a c L a u r y M e s s a g e to S t a ff E m p l o y e e O p en H ou se, 8/2 6/73 "But in a broader sense all of us can feel we were a part of the Ninth District's progress which developed the need for a new bank, and might say with pride . . . I own a small piece of this rock." J o y c e A. Sioan D ir ecto r Emeritus, 9/7/73 "It is our hope that the people of this community will share with us our pride in our new building and find pleasure in the use of the plaza." D a v id M . Lilly C h a ir m a n , B oa rd o f Directors 8 /9/73 "I'm delighted that you've all now had a chance to look us over in our new garb at the Federal Reserve. I'd be less than honest if I didn't say that we were very proud of our new home. "But if there's any pride on our part, it's certainly not personal. We are simply the heirs to a tradition of innovation and sense of quality that have been the hallmark of the Ninth Federal Reserve District for many years. Rather, my pride is on behalf of my colleagues, past and present, who had such evident foresight and imagination in the conception of our new building. And I'm glad to be part of an organization, especially a public organization such as the Federal Reserve, that agreed to let this bank strike out in new directions rather than pile one stone on top of another as is so often the case in public architecture." B ruce K. M a c L a u r y B a n k e rs O p en H ou se, 9/8 /73 A Plaza for Everyone The new building's design provides virtually the whole of a city block as a space for people to enjoy, in festivities or in contemplation. At the time of its opening, these thoughts were expressed: "This is a symbolic space, projecting from the strong geological base o f the region. The uncovered granite mountain has been formed into a sloping plane and all the spaces below are symbolically carved into the mountain. There are sloping plazas elsewhere in the world and there is one quality common to all o f them: the sloping plane encloses people and unifies people. Once you are on it, you are also i_n it. Besides people, there are textures and shade given by the trees, there are expressions o f our culture today with imagination and beauty and symbolism in the sculptures, there are seats everyw here if you want to sit. But as you move on the plaza you will develop an ever-changing relationship between you and the different parts and objects on it. "1 do hope that this space will become the friendly stage for the many exciting activities and games urban people play in their city." G u nn ar Birkerts A rch itect 2 "Just as my predecessors and colleagues tried to reach beyond the ordinary in conceiving, designing and constructing this space, I hope that you will view it as something more than just another office building and one more public gathering place. 1 hope you will catch its spirit, one so perfectly portrayed in Paul Granlund's sculpture —wherein 1 see man breaking free from the confinement o f past molds to burst forth with a bold thrust into new life, new freedom, new creativity and new hope. M ay this same spirit guide our future endeavors, as a bank, as a community and as a nation, so that we may continue, with God's help, to reach for and to attain our highest aspirations." Bruce K. M acLau ry P resid en t "T his is a time of celebration and I think of sculpture as one fo r m o f celebration. Celebration may be a requisite to h u m a n ness. It m ay well be necessary fo r a sculptor, in order to remain h u m a n , to shape that which he holds true about h im s e lf — to draw lines, describe an arc, create a space, design an architectural form , to fo rm clay or fabricate steel and to take time, as we are, in order to g iv e shape to o u r m ea n in g. The truth about ourselves, our val u e s —as revealed in picnics, F o u rth o f July, solem n feasts, birth days, bicentennials — are necessary to o u r survival as hum ans. H u m a n values are held or offered in trust, in hopes that others will fulfill that trust, an d o u r history speaks o f that continuity of our hopes an d dream s. H u g h Galusha, together zoith m any others, had dream s which are realized here in the architectural dimensions of G u n n a r Birkerts' work. A s sculptors accepting that trust, o u r hope is that y o u r h u m a n n e s s will be served. You are the guests of honor at this celebration of o u r h u m a n n e s s . A token o f o u r value as man is secure in the vault beneath the plaza; the fiv e billion would only be a n u m b e r without h u m a n im agination." Paul Granlund Sculptor 3 The Future of Banking Current problems and pressures in banking were ex plored in depth at tzvo conferences during the year to give better perspective on the future direction o f bank ing. The Conference on Banking and Banking Regula tion dealt with overseas and domestc activities o f banking organizations and their regulation. Most o f the discussion about domestic banking centered around the Bank Holding Company movement and the Federal Reserve's administration o f the Act. The ideas raised were challenging and the suggestions controversial. "T h e enormous importance of finance and financial services is clear, and has been for a long time. But the importance of profitability as the driving force behind a rational, innovative and efficient financial system is not universally appreciated... "T h e growth of diversified bank holding companies is one of the most important forces now at work to unify the nation's capital markets. The bank hold ing company can overcome, in ways a bank cannot, impediments to flows of capital caused by geo graphic restrictions, size limitations, and limits on permissible activities. It can help to break down unequal access of various types of business, units of government, and consumers to financial exper tise, contacts with specialized investors and pro fessional fund-raising cap ab ilities... "Th e proviso that I have been leading up to is this: banking organizations, seeking profits in an atmos phere that assures vigorous competition, cannot be expected to act in the public interest unless they must pay the appropriate prices for the risks they take. Put another way, it is essential that the deck is not stacked in their favor by an explicit or implicit system that keeps risks from being properly ap praised and weighed. This is a vexing problem for everyone concerned." S a m u el B. C h a se, Jr. B o a rd o f G o v e r n o r s o f the F ederal R es er v e System "Clearly a restructuring of the United States capital markets will be in the public interest. The first implication is increased competition and, to the ex tent that the market is more competitive, the con sumer stands to get more efficient services at less c o s t . .. "A nother benefit, of course, is in the area of m one tary policy. A bank holding com pan y—sensitive to c h a n g e s o c c u rrin g an d a b o u t to occu r in the economy —can make its subsidiaries aware of such developments directly, and promptly. "In view of the potential benefits, it is surprising that the Federal Reserve has not taken more advan tage of the opportunity open to it for greater influ en ce. W o rk in g w ith an a m b ig u o u s p iece of legislation designed presumably to allow it great flexibility of action, the Federal Reserve still be haves as if it were only the central bank for the commercial banks' demand d ep o sits... "Despite the fact that mortgage banking and leas ing are highly competitive industries, the Federal Reserve seems unwilling to allow bank holding companies to compete fully in these markets. The quest for profits and the threat of losses impose great d is c ip li n e ov er e x e c u tiv e s. T h is kind of market discipline should be sufficient. Nonbank entities of a bank holding company should be allowed to stand or fall in their own industries unencumbered by bank-type regulation." J o hn R. B unting, Jr. First P en n sy lv a n ia C orporation " . . . I find it difficult to understand the v iew ...th at long-term debt has no weight in considering the adequacy of capital of a bank. I admire the sim plicity of the resulting definition of capital, but I seriously question our industry's future access to needed capital if the concept persists. "T h e rationale escapes me. I have reviewed a num ber of studies of bank capital, and after peering through the hedges dedicated to tradition, I can find only the central function of providing protec tion to depositors against potential asset shrinkage due to bad credits or forced liquidation in adverse circumstances. Long-term lenders have indicated a substantial willingness to provide this protection at an after-tax cost substantially below that required by investors in bank stocks. The return on equity in a capital structure which includes long-term debt is therefore higher than it would be if equal capital were provided solely by equity. Increased profita bility through the stratification of capital seems to me a worthwhile objective both for bank managers and for bank supervisors." T h om as /. Storrs N orth C aro lin a N ation al Ban king C o rp o ra tio n "I am afraid that, in my view —which certainly is at variance with the views of Mr. Bunting and Mr. Storrs —bank holding companies enjoy a major competitive advantage over independent finance companies. This advantage lies in the capability of bank holding companies to raise money more cheaply because the investing public —and particu larly, the rating agencies —believe that the ultimate solvency of the bank holding companies rests on 5 the dedication of the Federal Reserve to maintain ing the viability of the commercial banks in these holding companies. That dedication of the Fed is attested to by the history of Fed actions. As long as the Federal Reserve takes that obligation seriously then, I submit, holding companies enjoy a specific advantage over their nonbank competitors." D an iel H. Brill C o m m e r c ia l Credit C o m p a n y "It seems to me that a good deal of what we've been saying... relates, in part, to the price we're paying for the political process where we left much too much implicit in 1970 at the time the Bank Holding Company Act was amended and clarification was avoided. Congress left the clarification up to the Fed, and it seems to me the Fed left part of that clarification up in the a i r . .. "In the absence of some clarification, the necessity for the Federal Reserve System to be engaged in affiliate re g u la tio n b e c o m e s a se lf - fu lf illin g prophecy, because, in the absence of any clarifica tion, the public mind is somewhat confused and it does believe the Fed regulates the affiliates. The Fed continues to pass on applications which talk about the capital adequacy and capital structure not just of the bank but of the holding company and the nonbank affiliate, and that adds, I think, to the confusion... "More important —and this gets to something which was important and implicit in Mr. Bunting's paper, and which Mr. Storrs talked about indirectly —is the question of capital. Mr. Chase says in his paper, 'Furthermore, in the quest for profitability, bank holding companies can and do use their banking subsidiaries to strengthen the parent corporation and its nonbank subsidiaries at the expense of the strength of the bank.' I guess I am somewhat surprised that there are still those who feel that capital has much or anything to do with the strength of the bank." H ar ry P. G u e n th e r C a rter H. G o l e m b e A s so cia tes , Inc. "From the System's creation in 1913, it has been unlike many other regulatory agencies in that Congress has always been very concerned about the banking community running the central bank ... But it is no less important [today] that the System advocate the public interest and remain free of undue influence by the banking com m unity.. .The goal is achieved by balancing equitably the inputs provided by a diverse group that includes banks, their competitors and customers, trade groups, 6 Congress, scholars and others, and finally, one hopes, arriving at a rational 'policy.' "In carrying out its work under the authority of acts of Congress, the Board tries to interpret the acts faithfully . . . Essentially we are simultaneously attempting to assure a stable financial environment and an environment that nurtures a strong, dy n a m ic and in n o v a t iv e fin a n c ia l sy ste m . In this process the attitudes of Congress will remain a pivotal factor in determining the regulatory climate in which both regulators and bankers must coexist. I would therefore like to emphasize that many of the areas discussed at this conference do involve Congress." G overnor Jeffrey M. Bucher B o a r d o f G o v e r n o r s o f the F ederal R e s e r v e System The second conference was The Ninth District Examiners Conference and domestic banking was viewed from a different perspective. /4s part o f the attention given to liability management at that confer ence, Associate Professor Thomas Harter o f the Uni versity o f Colorado spoke about " Debentures as Bank Capital." "Th e commercial banker is kind of a paradoxical creature. He sits behind his loan desk and he tells his borrowers all the bad points of leverage, yet he is one of the most highly-leveraged business opera tions in the United States pushing to be even more highly leveraged... "[Corporate] Debt is attractive to the banking in dustry because of the leverage that it offers and, in particular,... it magnifies the return on the equity base. The leverage, however, will cut both ways. As long as times are good, we get increases in the re turn on equity such as the 8% to 11% that was cited this morning; however, when we hit a period of adverse conditions we get a magnifying in the re verse direction. . . —the cost of servicing those debentures is eating up the earnings that should be absorbing lo sses... "T h is causes net profits to take on much more of a cyclical nature than they otherwise would because of the fixed nature of the cost of the debt. The long term debt should represent a capitalization of fu ture incomes that the bank is putting on its balance sheets n o w ... [Thus] they have increased their need for capital because they have already discounted their future earnings streams and that earnings stream is the first line of defense against the future loss potentials. They have eliminated that first line of defense, at least in part, and put it on the balance sheet now and want it counted as c ap ita l.. .They're using their future capital to meet their current need by capitalizing their future income in the form of long-term debt. The use of the long-term debt by the banking institution reduces that institution's potential use of more long-term debt in the future. And in so doing, it reduces their ability to generate ca p ita l w h e n it is n e e d e d in term s of ad v erse con d itio ns... “If they allow long-term debt to be counted as a capital structure item and the banks go ahead and increase that portion of their capital base, the Fed eral Reserve System will have to do one of two things: They will have to provide some type of mechanism to guarantee the profitability of the commercial banks so that they can service that debt or they will have to allow more bank failures... In another speech at the Examiners Conference, Professor Roy Schotland o f Georgetown University spoke about "Ethics in Banking," in terms o f five standards o f conduct to be observed. After discussing lawfulness, fairness and efficiency, he proceeds to the other two "Standards" o f responsiveness and progressiveness. "Banks are insulated in many ways from compe tition, they derive substantial benefits —for many, far above what they pay —from governmental in surance and examination, and they have the author ity and the responsibility of assembling other people's money and deciding who shall and who shall not be able to borrow such money. In the course of those decisions they are given unique access to confidential commercial or personal infor mation. If the banker is a more respected member of the community than the fried chicken franchiser, it is not solely because he has been with us longer, but also because we have given him such an un usual authority and we rely so greatly upon his using it not only honestly and lawfully, but effi ciently, without waste or extravagance in perform ing the middleman's function of getting some other people's money loaned to still other people. banker and a few other businessmen. In addition, bankers must be willing to explain to customers why a particular practice is followed and must be ready to consider that sometimes, mirabile dictu, the customer may even be right in questioning a prac tice. And when I speak of willingness to explain and readiness to reconsider, I mean not merely exhortation to employees to smile and be good listeners, I mean a serious system for handling com plaints, questions, and suggestions. "Progressiveness is an obligation which, I fear, we meet least well. Progressiveness is not merely frost ing on the cake. If people in a system work honestly and efficiently by the rules of the system and try diligently to consider the needs and wishes of others in the system but do not give a top priority to watching for ways in which the system is not working very well, and ways in which the system must adjust to meet economic or technological or social changes, then that system's fate is doom, severely wasteful with injurious losses. Improve ments and adjustments must be made and the question is whether the obligation of progressive ness is met and problems are coped with before becoming severe, or whether adequate attention is not given to needs until they reach the screaming or crying level. "Unless we give fully as high a priority to change as we do to lawfulness and efficiency we will find on the one hand that many strands in our legal, regulatory web are blocking wise and efficient business conduct because of a vanished problem or fear of an earlier generation, while on the other hand we lack protection against new evils. Sim i larly, one generation's efficiencies will become the plodding antiquities of the next gen eration . . . " "Responsiveness is an obligation because the central role and pervasive impacts of bankers in their communities make it almost uniquely import ant that they be sensitive to the communities' needs and desires, and that sensitivity is autocratic pater nalism unless it is continuously shaped by the community and not merely by the banker or by the 7 Regional Economic Policy Increasing attention and concern are being given to the need for planning and directing the future o f regional areas, w hether it be the Ninth Federal Reserve District, a particular state, or sonic region in a foreign country. To help put a focus on these concerns, the batik joined with the Minnesota Economics Association to offer a "Conference on Regional Economic Policy" for the aca demic community o f the Upper Midwest. Also earlier in the year, the bank sponsored the Upper Midwest Coun cil publication of "Recent Trends/Future Prospects" — a look at U pper Midwest population changes; and President M acLaury participated in the KTCA-TV Seminar on Minnesota's Future. “ If you examine the impact in the small rather than in the large (and it takes an awful lot of patience to do that), you can identify people and places that have been positively affected by programs and projects in regional p olicy... “ 'How' is the major issue. How do you do it? Ana ly tically , it b o ils d ow n to a very sharp ch oice between the direct inducement of industry by sub sidy versus the indirect inducement to industry by subsidy to the local infra-structure —that is, build ing a dam or an access road or a water and sewer system, or an industrial p a rk ... “We are n ow s a y in g that we ou gh t to put the remedy where it has the best chance of taking hold and where it will spread a healing effect on those areas for which we have defined the problem. The term w h ic h c a p tu r e s all th is, of co u rse, is the 'growth c e n te r'... “ Since we are spending so much more through public budgets on public works, it is almost as if you could forget the original concern about regional economic depression and say we need regionalism to effect a more rational and desirable distribution of infra-structure spending." B enia m in Chinitz B ro w n U niversity “We maintain that Government expenditures on regional policy, unlike most other forms of public expenditure, bring about an increase in the overall utilisation of labour resources (i.e. an increase in productive potential) which is beneficial to the whole economy in terms of increased employment and output. Further, we believe that the real costs associated with the United Kingdom's regional policy expenditures in the last decade have prob ably been negative. Expenditures on regional pol icy should therefore not be regarded as competing with other public or private expenditures; and increases in such expenditures do not necessarily 8 require sacrifices either in terms of other public expenditure or in terms of higher taxation. On the contrary all regions may enjoy an increase in real d is p o s a b le in c o m e b e c a u s e g e n e ra l ta x a tio n is lower (or public expenditure higher) than would have been possible in the absence of regional p o lic y ... “ Finally, the view is frequently expressed that a solution to the regional problem lies in an unprec edented and sustained increase in the rate of growth of the national economy. Under such condi tions it is argued that regional policy expenditures would be superfluous and wasteful. We would argue that such a sustained expansion is con strained by the pressure of demand in the fully em ployed areas (and by the balance of payments) and that it is in precisely such periods of expansion that an active and effective regional policy is needed to divert the pressure of demand to Development Areas so that additional resources are brought into use to make the general expansion more easily sustainable." B arry M o o r e a n d Jo h n R h o d es U niversity o f C am b rid g e “ In 1965 there was a reorientation of Swedish re gional policy away from subsidies to labour m obili ty to a scheme of subsidies to mobility of invest ments in manufacturing. According to the Location Policy Act, investment —mainly in manufacturing — in the forest counties should be subsidized through a system of low interest loans and significantly re duced repayment sch em es... “A country like Sweden, with an extended and nar row geometrical shape, naturally develops large income inequalities due to the differences in com munications costs between different parts of the country. Such a country should have an integrated communications and location policy counteracting the strong tendencies towards stabilizing inter regional differences in the standard of living . . . “ Our research shows that the most efficient ways to increase the relative role of the sparsely populated and dislocated areas are unbalanced transportation investment plans increasing the intraregional transportation system efficiency in these areas and scheduling reforms in the same areas to decrease the intraregional time costs of transportation. “The implementation of an industrial development cluster policy to further the development of a num ber of “Metropolitan alternatives" is a complicated political problem. An industrial clusters policy has to be more centralized politically than the ordinary market guided planning of investments in Sweden (Continued on page 10) "If you look at the world as a region —which is what I'm supposed to be talking about —it is a region with inputs o f energy and not much else, which has clear implication for the future. It is that the energy problem is ultimately soluble, simply because o f the good old sun. The whole biosphere doesn't use a fraction o f 1% o f the sun's energy and it's obvious, therefore, that the energy problem is soluble. The materials problem perhaps isn't, and that I think is a tougher one. Although if we had energy, we can recycle m aterials... "One o f the things I've been worrying about lately is ecosystem. What is an ecosystem? O f course, it's a region. A region is an ecosystem, something which is sufficiently isolated from other things to exist, or at least to be classified... "I've been thinking about the period o f evolution. I've been giving some lectures this fall in Bloomington, Indiana, on the question as to how fa r the Darwinian kind o f models can be applied to society. One o f the interesting things in the Darwinian model is the importance o f repro ductive isolation; regionalism, in other words. That is, that if you don't have regions, everything kind o f slurps down to equilibrium and then evolution comes to an end. The trick is that without diversity there is no evolution, only some kind o f ecological climax, that is, equilibrium in which all mutations are adverse and anything that can happen is bad. So without the isolation o f regions, we wouldn't have had any biological evolution and, I suspect, we wouldn't have had all that much social evolution either. "A case in point is what I sometimes call creeping Wichitazation. As I was driving into Nairobi from the airport a couple o f years ago, I looked at the skyline, and I said, "Oh Lord, we've landed in Wichita by mistake." I took my son up the Post Office Tozver in London to show him London and we couldn't see St. Paul's through the skyscrapers. And now Tokyo looks like Dallas, Johannesburg looks like Dallas, everything looks like Dallas, if it isn't Wichita. You get the feeling that we travel faster and faster to places that look more like what we left behind. So there really isn't much point in going a n y w h e r e ... "There are enormous dangers in this deregionalizing o f the world —particularly biological dangers and I suspect cultural dangers also. In a sense, just as the gene bank is being depleted by extinction, the culture-gene bank is being depleted also. Now this isn't quite as serious perhaps as it seems because the great difference between biological evolution and social evolution is sex. That is, whereas the biological world never developed more than two sexes —there are some doubtful cases in the plants and in the human race —the social world is multi-sexual. If you think o f the genetic base o f the social world as the knowledge structure it is —that is, the cognisphere, we can make artifacts and organizations by bring ing together parents from all over the l o t ... The clear implication, o f course, is that the knowledge structure could reproduce itself easily. If the whole world were destroyed today, except Australia, we'd have it all back again in 200 years. One university is enough. That's all; one university could be the gene o f the whole new modern world —particularly if it had a Xerox machine. After all, the first Xerox is DNA and so that sort o f encourages m e ... "On the other hand I worry about the optimum degree o f regionalism. You can h ave both too much o f it and too little, and with all the modulization o f the zvorld, it has faults which underlie the social structure. Living on the earth is a little like living in San Francisco, isn't it? Last w eek we heard the San Andreas Fault go "eeek" and it was pretty scary and also cost a billion dollars. We certainly can't be wholly optimistic about the future o f the world as long as these extraordinarily dangerous faults exist in it, particularly in the international system ... "I'm all fo r austerity, especially fo r other people, but I wouldn't put all my eggs into this basket. The other basket is knowledge, essentially the continued increase in human knowledge. While there are limits to the grow th o f knowledge, fortunately, they're a helluva long w ay off. All the evidence is that w e only use 10% o f the human nervous system and that this is a vast mind, a huge resource that we've hardly scratched, but I think we'd better hurry up on it a little." Prof. K en n eth B oulding U n iv ersity of C olorad o “ The W orld as an E co n o m ic R eg io n ” C on feren ce on R egional E co n o m ic P olicy 9 (Continued from page 8) of today. This is an immediate consequence of the need to calculate interdependent profitabilities of indivisible investment projects in the activities be longing to a development cluster. All the dominant political parties in Sweden have preferred the de centralized market system of investment decisions. They have at the same time adopted the principle of industrial development cluster policy in order to further a more decentralized pattern of economic development. It is almost impossible to predict how this fundamental conflict of goals could be resolved within an unchanged economic and political struc ture of the Swedish so ciety. . . " Prof. A k e Andersson U n iversity o f G o th en bu rg "H ow ever one may applaud, or be distressed by, the variety of projections of Minnesota's future, we do need to be aware of the trends. And the point is: do we like these trends? Is this where we want to go? And just as important, what can we do about it? Projection studies indicate that the broad trends in major land use and population changes during the period ahead are probably inexorable. Forces push ing development in a particular direction at any point in time do indeed tend to be strong. They en compass not only economic incentives, but legal and political frameworks, and even social outlooks of a population. This cumulative momentum of the past is not something easily diverted. Such forces are not only strong, but often subtle and therefore difficult to come to grips with. "Nevertheless, we don't need to accept any given course of events as inevitable: the question is really one of benefits versus costs: how much are we will ing to pay to shape our future. In certain situations, there may be little cost at all. Most of us think of laws or regulations that are still on the books long after their original purpose has passed the scene. Such anachronisms stand in the way of efficient progress, and their removal can in fact mean sav ings. I'm thinking of building codes, for example, or local government boundaries that no longer make sense. "Another way to improve our environment at less cost than might appear is through the use of public policy to compensate for the failure of the market pricing system to incorporate all costs of a particular product or service. By now, many laymen are fa miliar with the concept that economists call 'exter nal diseconomies,' that is, the costs of cleaning up the air or the rivers, of barring noise around air ports or congestion in the city, of paying cleaning bills around factories, costs that fall on someone 10 other than the polluter. When public policies re quire those who pollute to bear these costs, we are simply redistributing the costs in a more equitable fashion, not increasing them for society as a whole. "But not all attempts to guide our own destiny will be inexpensive. For example, we may decide that it pays to subsidize the output of certain industries or crops, or advocate an economically inefficient lo cation for a particular plant simply because we be lieve the social benefits outweigh the additional cost. As a generalization, I think we must assume that the greater the change required to divert the natural unplanned course of events, the higher the price we are going to have to pay to bring about the change. For example, to divert population growth from metropolitan areas to out-state districts in meaningful numbers will probably require costly disincentives for locating in the metropolitan area, together with costly incentives to settle elsewhere. In saying this I mean no disrespect for our outstate communities. I simply mean that past popula tion trends, and projections for the future, reflect a concentration of population in and around metro politan areas; to change this trend in a meaningful way would probably require costly countermea sures. "At this broad level of generalization, I would argue that the state should concern itself with three is sues: 1) the distributional patterns of population changes, 2) a more equitable distribution of gains from growth among the state's present population, and 3) insure that increases in living standards to day are not at the expense of quality of life tomor row. These are easy principles to enunciate, but harder to specify and even harder to implement. "W h at we mainly lack is sufficient effort to integrate views on each one of these particular areas into an overall framework to guide the state's development. Buckminster Fuller is fond of saying "w henever I draw a circle, I immediately want to step outside of it." We too must step outside the small circles we draw around our special spheres of interest and at tempt to see the w hole picture, with all its many in terrelationships. It's not an easy thing to do, espe cially for a people who historically have resisted planning in the name of too much government, who pride themselves on personal freedom and independence. But again times change, and inter dependence in all aspects of life is now at least as important an organizing principle as independence was to our forebears." B ruce K. M a c L a u r y Federal R es er v e B a n k o f M in n e a p o lis The Role of the Central Bank The dedication ceremonies o f the new building brought many o f the district's bankers in to hear Chairman Arthur Burns and Louis Rasminsky, former Governor, the Bank o f Canada. Their remarks put particular focus on the unique role and obligations o f the central bank in both domestic and international economic policies. "T h e Federal Reserve was endowed by legisla tive mandate with a substantial degree of inde pendence within government. Freedom from the daily pressures of the political process has given the Federal Reserve the opportunity to make the hard choices that continually confront those who are responsible for economic and financial policies. Over the years, the Congress has significantly en larged the duties and responsibilities of the Federal Reserve System. The stature of our central bank has therefore grown within the counsels of government and in the minds of our people. Nowadays, the people of America expect the Federal Reserve to use its great powers to thwart —or at least to moderate —business recessions, and they also look to the Federal Reserve as the ultimate defender of the pur chasing power of their currency. " T o earn the c o n f id e n c e of the A m e ric a n people, the members of the Federal Reserve family have observed rules of conduct such as animate our great universities and our courts of justice. We have sought to foster a spirit of freedom and objective inquiry in the field of economic analysis. Our staff in Washington and the staffs of the individual Reserve Banks are encouraged to analyze economic and financial problems in the spirit of science and to express their findings freely. The Directors of our Reserve Banks, who are drawn from every region and practically every branch of business in our country, provide a constant stream of up-to-date information on business and financial develop ments. When the Presidents of the individual Reserve Banks meet with the Federal Reserve Board, as they do at very frequent intervals in our nation's capital, they have at their disposal a system of economic intelligence that cannot be matched by any organization or agency in our country or, for that matter, anywhere else in the world. "Concern for the general welfare, moral integ rity, respect for tested knowledge, independence of thought —these are the basic assets of the Federal Reserve. They are the foundation on which our nation's monetary policy is constructed. "T h e Federal Reserve must, of course, account for its stewardship to the Congress and to the gen eral public. We do so through news releases, publi cations, public addresses, and testimony before Congressional committees. The information that our central bank discloses about its myriad activi ties vastly exceeds, both in promptness and detail, that of any other central bank. We do, of course, withhold for a time information that could cause embarrassment to a foreign government or that might enable the more alert members of the finan cial community to gain an early and unfair advan tage over other citizens by becoming privy to the precise plans that the Federal Reserve has set in motion. Even here, once the need for delay in re porting has passed, full disclosure is made by the Federal Reserve, so that the Congress and the in terested public may be in a position to appraise the System's policies and actions, and so that we ourselves may benefit from outside review and criticism." A r th u r F. B u m s , C h a ir m a n B o a r d o f G o v e r n o r s o f the F e d er a l R e s e r v e System "The responsibility for attaining a reasonable degree of international payments equilibrium falls of course on creditor as well as on deficit countries. One is entitled to expect the creditor countries to remove impediments to their imports of goods and services and to follow policies which keep their economies operating at a high level of activity. I do not feel, for my part, that one is entitled to expect them to embrace inflation, or to tolerate it, in order to help restore international equilibrium, and one of the difficulties in the present situation is o b viously the world-wide nature of the inflation. It seems to me that what one is, however, entitled to expect is that the creditor countries should seek to control inflation by methods which do not offset the efforts of the deficit countries to bring their own balance of payments under control. To put the matter concretely, the impact of the very high level of short term interest rates in the United States on your balance of payments is less than it would be if Germany, in attempting to control her inflation, placed more emphasis on a restrictive fiscal policy than on a restrictive monetary policy, for in this case German interest rates would be lower and there would be more tendency for short-term funds to be repatriated to the United States. An appropri ate mix of policies is just as necessary in the inter national field as it is in the domestic field and this is one of the most difficult problems that has to be tackled in connection with the current efforts at international monetary reform. "So much for the international constraints on the use of monetary policy. What I have just said brings me to the second major constraint on mone 11 tary policy. Monetary policy is only one of a pair of twins which influence the total level of spending in the economy, the other of course being fiscal policy, which affects the total level of spending in the economy through changes in the amount of tax revenue taken from the private sector, through gov ernment expenditures and through the important lending activities of the Government. Monetary and fiscal policy are sometimes discussed as though they were completely separate. They are by no means the same thing but fiscal policy exerts a strong influence on monetary conditions because it is fiscal policy that determines the amount of bor rowing that the Government must do and this, together with the way in which the Government debt is managed, can have an important effect on the liquidity of the banking system, the money supply, and on credit conditions generally. For example if, in an inflationary situation, the total borrowing requirements of the Government to gether with those of the private sector are rising very rapidly, the central bank may find itself in the position of having to choose between allowing the money supply to rise more rapidly than it would like to see or allowing interest rates to rise more, or more rapidly, than it would otherwise consider appropriate. "T h e moral of all this is that one must con stantly seek to coordinate fiscal and monetary policy and to obtain that combination of the two which produces the influence on total demand and on the level of interest rates which is most appro priate to the country's domestic and international position. "T h is is easier said than done, and it is a con stant complaint of central bankers that in the task of controlling inflation governments all over the world rely too heavily on monetary policy and do not see to it that an adequate share of the burden is assumed by fiscal policy. There are no doubt im portant technical reasons for this, including the greater flexibility of monetary policy as compared with the tradition of an annual budget. But it is difficult to escape the conclusion that the unpop ularity of anti-inflationary policies provides a large part of the answer." Louis R a sm in sk y Form er G overnor Bank o f Canada 12 The full text o f individual speeches and copies o f the proceedings o f the various conferences used in this re port are available free o f charge. Direct your requests to: Office o f Public Information Federal Reserve Bank o f Minneapolis 250 Marquette Avenue Minneapolis, Miiuiesota 55480 Federal Reserve Bank of M inneapolis Financial Statement Directors & Officers Helena Branch Directors & Officers Statement of Condition D ecember 31 A ssets 1973 1972 Gold Certificate A ccount.......................................................................................... Special Drawing Rights Certificate Account..................................................... Federal Reserve Notes of Other Federal Reserve B a n k s ............................... Other C a s h ..................................................................................................................... Loans to M ember Banks............................................................................................ Securities Federal Agency O b lig a tio n s ........................................................................... U. S. Government Securities........................................................................... $ 114,240,000 7,000,000 26,688,000 10,455,000 9,900,000 40,284,000 1,631,304,000 25,684,000 1,367,269,000 Total Securities...................................................................................................... Foreign Currencies...................................................................................................... Cash Items in Process of C ollection .................................................................... Bank P rem ises.............................................................................................................. Other A s s e t s ................................................................................................................. 1,671,588,000 102,000 399,797,000 35,547,000 49,875,000 1,392,953,000 4,416,000 456,607,000 29,789,000 18,399,000 Total A s s e t s ................................................................................................... $2,325,192,000 $2,020,773,000 $1,171,138,000 $1,040,588,000 618,713,000 89,442,000 5,980,000 8,519,000 548,820,000 52,474,000 6,670,000 6,157,000 Total D e p o s i t s ..................................................................................................... Deferred Availability Cash I t e m s ......................................................................... Other L ia b ilitie s .......................................................................................................... 722,654,000 368,441,000 23,663,000 614,121,000 315,389,000 14,409,000 Total Liabilities............................................................................................ 2,285,896,000 1,984,507,000 Capital A c co u n ts Capital Paid In ............................................................................................................ S u r p l u s ............................................................................................................................ 19,648,000 19,648,000 18,133,000 18,133,000 Total C a p i t a l ................................................................................................. 39,296,000 36,266,000 Liabilities Federal Reserve Notes in Circulation.................................................................. Deposits Member Bank Reserve A c c o u n ts.................................................................. United States Treasurer-General A c c o u n t................................................ Foreign..................................................................................................................... Other D ep osits...................................................................................................... Total Liabilities and Capital A c c o u n t s .............................................. Ratio of Gold Certificate Reserves to Federal Reserve Note Liabilities.................................................................................... 14 $2,325,192,000 9.8% $ 77,902,000 7,000,000 27,004,000 5,053,000 1,650,000 $2,020,773,000 7.5% Earnings and Expenses For the Year Ending December 31 C u r r e n t E a rn in gs 1973 Interest on Loans to Member B a n k s ..................................................... .................... Interest on U.S. Government Securities.............................................. .................... All Other E a rn in g s...................................................................................... .................... $ 1,792,000 97,100,000 248,000 1972 $ 168,000 73,638,000 242,000 Total Current E a r n in g s ............................................................. .................... 99,140,000 74,048,000 C u r r e n t Expenses Operating E x p en se s.................................................................................... .................... Assessment for Expenses of Board of Governors............................ .................... Federal Reserve C urrency........................................................................ .................... 19,281,000 1,024,000 842,000 16,738,000 802,000 555,000 Total Current Expenses............................................................. .................... Expenses Reimbursable or R ec o v e ra b le............................ .................... 21,147,000 (893,000) 18,095,000 (833,000) Net Expenses................................................................................. .................... 20,254,000 17,262,000 C u r r e n t N e t E a r n i n g s ........................................................................... .................... $ 78,886,000 $ 56,786,000 Surplus, January 1 ........................................................................................ .................... Current Net E a rn in g s........................................................................ .................... $ 18,133,000 78,886,000 $ 16,895,000 56,786,000 Payments to U. S. T reasu ry.............................................................. .................... Dividends P a i d .................................................................................... .................... Net Profit or ( L o s s ) ............................................................................. .................... Surplus, December 3 1 ............................................................................... .................... 97,019,000 (74,485,000) (1,148,000) (1,738,000) $ 19,648,000 73,681,000 (53,401,000) (1,051,000) (1,096,000) $ 18,133,000 Volume of Operations* Loans to Member Banks Currency Received and Counted Coin Received and Counted Checks Handled, Total Collection Items Handled Issues, Redemptions, Exchanges of U. S. Government Securities Securities Held in Safekeeping Transfers of Funds 109 320 528 .7 Number 1973 995 98 million 311 million 471 million .8 million 6.8 million 383,962 440,063 1972 168 million million million million 6.3 million 366,235 358,310 Dollar Amount 1972 1973 $2,381 million $303 million 777 million 706 million 39 million 37 million 135 billion 117 billion 2.3 billion 1.8 billion 22.7 billion 4.1 billion 404 billion 19.0 billion 3.2 billion 336 billion "■All figures are for M inneapolis and H elena com b in ed. 15 Federal Reserve Bank of Minneapolis Directors Officers Bru ce B. D ayto n , C h airm an and Federal Reserve A gent Jam es P. M cFarlan d , D ep u ty C h airm an Bruce K. M acLau ry, P resid en t M aurice H. S troth m an , Jr., First V ice P resid en t Class A —E le cted by M e m b e r B an ks Roy H. Jo h n so n , P resid en t, 1974 First N ation al Bank, N eg au n ee, M ichigan Sheldon L. A zin e, A ssistan t C ounsel and A ssistan t Secretary Earl O. Beeth, A ssistan t V ice P resid en t M elvin L. B u rstein, G eneral C ounsel Frederick J. C ram er, Vice P resid en t Ralph J. D reitzler, V ice P resid en t L eon ard W . Ferneliu s, V ice P resid en t L ester G. G able, Vice P resid en t T h om as E. G ain or, V ice P resid en t Roland D. G rah am , S enior V ice P resid en t A lbert R. H am ilton, G eneral A u d itor Richard C. H eib er, A ssistan t G eneral A u d itor D ouglas R. H ellw eg, V ice P resid en t W illiam B. H olm , A ssistan t V ice P resid en t Ronald O. H ostad , A ssistan t V ice P resid en t John D. Jo h n son , A ssistan t V ice P resid en t Ronald E. K aatz, R esearch O fficer A rth u r I. Lee, A ssistan t V ice P resid en t John A. M acD onald, Senior V ice P resid en t D avid R. M cD onald, V ice P resid en t C larence W . N elson, V ice P resid en t and D irector of Research John P. O lin, V ice P resid en t and Secretary M ichael J. P int, A ssistan t V ice P resid en t Ruth A. R eister, A ssistan t V ice P resid en t and A ssistan t Counsel C harles L. Shrom off, A ssistan t V ice P resid en t H erm an M. Slind, A ccou n tin g O fficer R ichard B. T h om as, A ssistan t V ice P resid en t C lem ent A. Van N ice, S enior P resid en t Joseph R. Vogel, C hief E xam in er R obert W . W orcester, V ice P resid en t D avid M. S m ith , P resid en t, 1975 First N ation al Bank, R iver Falls, W isconsin C h arles T. U n d lin , P resid en t, 1976 First N ation al Bank of the Black Hills R apid C ity , South D akota Class B —E le cted by M e m b e r B an ks John H. Bailey, P resid en t, 1974 The C retex C o m p an ies, Inc., Elk River, M innesota D avid M. H esk ett, P resid en t, 1975 M on tan a-D ak o ta U tilities C o m p an y , Bism arck, North Dakota W arren B. Jo n es, S ecretary -T reasu rer, 1976 Tw o D ot L and & L ivestock C o m p an y , H arlow ton, M ontana Class C —A p p o i n t e d b y B o a r d o f G o v er n o rs B ruce B. D ayto n , C h airm an , 1974 D ayton H u d son C o rp o ratio n , M inneapolis, M innesota Jam es P. M cFarlan d , C h airm an , 1975 G eneral Mills Inc., M in n eap olis, M innesota H ow ard R. S w earer, P resid en t, 1976 C arleton College, N orthfield, M innesota M e m b e r o f F e d er a l A d v i s o r y C ouncil G eorge H. D ixon , C h airm an and P residen t First N ation al Bank, M in n eap olis, M innesota Helena Branch Directors Helena Branch Officers W illiam A. C o rd in g ley, C h airm an D avid G. D ru m , V ice C h airm an H ow ard L. K nous, V ice P resid en t Bruce J. H ed blom , A ssistan t V ice P resid en t A p p o i n t e d by B o a r d o f D irecto rs F ed eral R e s e r v e B a n k o f M in n e a p o lis R obert I. P en n er, P resid en t, 1974 C itizen s First N ation al Bank, W olf Point, M ontana John R eichel, P resid en t, 1974 First N ation al Bank, B ozem an , M ontana D onald E. O lsson , P resid en t, 1975 R onan State Bank, R on an , M ontana A p p o i n t e d by B o a r d o f G o v e r n o r s D avid G. D ru m , P resid en t and C h airm an, 1974 M on tan a Beef In d u stries, Inc., Billings, M ontana W illiam A. C o rd in g ley , P resid en t and P ub lish er, 1975 G reat Falls T rib u n e, G reat Falls, M ontana Term expires D ecem ber 31 o f indicated year 16
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