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O n a c h a n g i n g s tr u c tu r e f o r c h a n g i n g ti m e s Federal Reserve Independence F e d e r a l R e s e r v e B a n k o f M in n e a p o lis A n n u a l R e p o rt 1 9 7 6 Perspectives on Federal Reserve Independence a changing structure for changing times Federal Reserve Bank of Minneapolis Annual Report 1976 To provide for the establishm ent of Federal reserve banks, to furnish an elastic currency, to afford m e a n s of rediscounting commercial paper, to establish a m ore effective supervision of banking in the United States, an d for other purposes. Perspectives on Independence. How Structure Affects the Function of Monetary Policy Our 200th year, p erh ap s m ore than m ost years, h as g enerated its sh are of questions about m onetary policy an d about the role of the Federal Reserve S ystem —the nation’s central b an k —in solving our econom ic problem s. Over the past few years, the dual problem s of inflation and un em ploym ent hav e b een especially vexing. And questions about how effectively our m oney m an agers are responding to such problem s reflect the urgency an d com plexity of the inflation/ unem ploym ent dilem m a. T hese questions also reflect increasing reliance on m onetary policy—m anaging the supply of m oney an d credit—as a m ean s of assuring national econom ic health. That em p h asis has grown as w e have had to co p e with large deficits and difficult econom ic events such as the energy crisis, fluctuating foreign currencies, and continu ing post-Vietnam adjustm ents. The focus on m onetary policy h as g enerated questions not only about policy actions, but about the structure an d pow er relationships of the Federal Reserve System —questions about its “independence.” Differences of opinion over m onetary policy actions are to be ex pected, regardless of how the System is structured. Given the limits of h u m an w isdom an d the incom plete state of our econom ic knowl edge, such differences are normal an d inherent. That there is such disagreem ent d o es not m ean the procedures are wrong or the structure inappropriate. If, on the other hand, the structural m ake-up of the System , or its procedures, ten d s to inhibit d evelopm ent an d im plem entation of good policy decisions, then w e can try to im prove those structures an d procedures. Since our world is changing an d issues seem to be getting more com plex, it w ould be surprising if som e adjustm ents in the m ech a nism s for m onetary m an ag em en t might not prove useful. It’s against this background that the various proposals to ch an g e the structure an d limit the “in d e p e n d en c e” of the Federal Reserve System d eserv e to b e discussed. T h e S e m a n tic s o f F e d In d e p e n d e n c e Quite probably the term “in d e p e n d e n c e ” has b een over used. It w as a key concept in the design of our central banking sy stem —but in a relative sen se, not as an absolute. What d o es “in d e p e n d e n c e ” m ean? Is the Federal Reserve accountable? Is it responsive to changing national priorities? First, let’s b e clear on w hat in d ep en d en ce d oes not m ean. It d oes not m ean decisions an d actions m ad e without account ability. By law and by established procedures, the System is clearly accountable to C ongress—not only for its m onetary policy actions, but also for its regulatory responsibilities an d for services to banks an d to the public. Nor d o es in d ep en d en c e m ean that m onetary policy actions should be free from public discussion an d criticism—by m em bers of Congress, by professional econom ists in an d out of governm ent, by financial, business, an d com m unity leaders, an d by informed citizens. Nor d o es it m ean that the Fed is in d ep en d en t of the governm ent. Although closely interfaced with com m ercial banking, the Fed is clearly a public institution, functioning within a discipline of respon sibility to the “public interest.” It h as a degree of in d ep en d en ce within the g o vernm ent—w hich is quite different from being independent of governm ent. Thus, the Federal Reserve System is m ore appropriately thought of as being “insulated” from, rather than in d ep en d en t of, politicalgovernm ent an d banking-special interest pressures. Through their 14-year term s an d staggered appointm ents, for exam ple, m em bers of the Board of Governors are insulated from being d ep en d en t on or beholden to the current adm inistration or party in power. In this and in other w ays, then, the m onetary process is insulated—but not isolated—from th ese influences. In a functional sen se, the insulated structure enables m onetary policy m akers to look beyond short term pressures an d political expedients w h en ev er the long-term goals of sustainable growth and stable prices m ay require “unpopular” policy actions. Monetary ju d g m en ts m ust be able to w eigh as objectively as possible the merit of short-term expedients against long-term c o n se q u e n c e s—in the on going public interest. M o n etary P o w e r ... M onetary decisions hav e special im portance b eca u se of their im pact on all other asp ects of our econom ic life. In a very real way, the pow er to create m o n ey also carries the pow er to destroy its value. Pushed to Much a s they m ay contribute to the country’ s progress, m onetary p o w e rs ... are not omnipotent. To be effective... they m u st be closely coordinated with the other m ajor pow ers a n d policies of governm ent which influence the country’ s econom ic life. —President Franklin D. Roosevelt, 1 9 3 7 extrem es of m isjudgm ent or illadvised action, m isuse of m onetary pow er can erode values an d destroy the econom ic fabric of the society it serv es—by inflation, boom bust depression, im m oderate stimulus, or by excessive restraint. ...And Its L im its While m onetary policym akers have great potential pow er over the econom y, there is m isunderstanding about the practical limits of such power. Typically, m onetary policy can restrain credit expansion m ore effectively than it can stim ulate borrowing, it can control the supply of m oney, but not the d em an d for it. It can influence interest rates, but not control them . The central bank can influence only a few of several factors that determ ine the course and vigor of econom ic perform ance. The problem s are com plex an d constantly changing, our know ledge is never com plete, and m echanism s for avoiding harmful policy side-effects are not adequately developed. Finally, the ultimate effects of m onetary actions are not precisely know n until m onths later, if at all. Thus, just as responsible m onetary policy m ust avoid extrem e actions—w hich on b alan ce m ay be m ore harmful then helpful to the eco n o m y —so m ust the public be restrained in its expectations as to w hat m onetary policy alone, how ever well m anaged, can accomplish. T h e L a w m a k e r s ’ R ole Politicians, the elected representatives w ho m ake our law s and determ ine public policy, are them selves subject to pressures inherent in our structure of governm ent. They are expected to respond to the desires an d n e ed s of their constituents. And constit uent expectations tend not to be tem pered by such realities as cost an d resource limits. In short, politicians are under pressure to acco m plish m ore than available resources permit. That can m ean attem pt ing m ore than w e can afford or are willing to pay for. Put another way: 3 it is easier to vote for n eed ed program s than for increased taxes. Such pressures probably give our national policies an d goals an inflationary tilt. This is especially true in a dem ocracy w here the powers deleg ated to our elected officials m ust be affirmed by “back hom e” constituents every two, four or six years. The n eed for our elected representatives to b e responsive and “tuned in” to their constituents is a vital function in our political process. It provides important g u aran tees to citizens. But it m ay also limit the extent to which elected representatives can afford to consider the long-term merits of policies. Policy actions that m ay lead to defeat in the next election, how ever valid, are not likely to be seen as attractive options. B alanced policy therefore requires an institutional structure that insulates m onetary policym akers from such short-term pressures— w hich is to say, one that also insulates elected officials from the negative electoral co n se q u en c es of policy decisions that m ay be essential but unpopular. Obviously, not all policy decisions pose this type of conflict. Not all elected officials yield to short-run pressures or would need to. In any case, the merits of a given policy are seldom unam biguous. But the co n se q u e n c e s of persistently expansive m onetary policy are too sev ere to risk procedures that co m pound a bias in favor of short-run options an d produce short sighted results. O th er M o n ey Historically, w e h av e used a variety of m echanism s to m anage m o n ey —a stock of silver an d gold bullion or currency backed by metals. T hese m ech an ism s regulated the m oney supply according to irrelevant ch an g es in our stock of m etals and offered little or no con sideration of actual n ee d s of the econom y, short- or long-term. Our ow n history, and the experiences of other nations, are replete with exam ples of ru n a w a y inflation and econom ic chaos that develo p ed b ec a u se the lure of superficial solutions outw eighed responsible but less popular policy actions. Out of long experience, our m onetary system h as evolved so that the supply of m oney and credit are “m a n a g e d ” at levels intended to b e m ost conducive to stability, growth, an d a high level of production an d em ploym ent in our national econom y. That responsibility requires not only a high d eg ree of technical know ledge about the econom y an d the interaction of its different elem ents and forces but also requires objective, “in d ep en d en t” judgm ents about the best m onetary adjustm ents to help achieve those national goals. H isto ry o f R efo rm s Over the years the Federal Reserve System has proved rem arkably ad ap tab le to changing needs. Both policies an d procedures have b e en altered w h en the n eed for ch an g e b ecam e clear—som etim es 4 by statutes or am e n d m en t to the Federal Reserve Act, often by policy an d adm inistrative im plem entation within the authority of the Act. The Federal R eserve System w as barely in operation w hen it b e c a m e app aren t that p u rch ases of governm ent securities, now the m ain m echanism for influencing the m oney supply, ad d e d to bank reserves an d thus b e ca m e an unexpected m echanism for effecting m onetary expansion. The Banking Acts of 19 33 an d 1935 reaffirmed and strengthened the Federal R eserve’s in d e p en d e n ce from the executive branch— they rem oved the Comptroller of the Currency and the Secretary of the Treasury from the Federal Reserve Board—and affirmed its inde p en d en t budget an d incom e procedures. They delegated to the Fed the pow er to control stock margin requirem ents and to regulate savings interest rates. World War 11 saw the central bank directly supporting the financing of u n p reced en ted w ar expenditures with su b seq u en t m onetization of that d eb t after the war. in the fam ous “accord” of 1 9 5 1, after lengthy d e b ate both public and within governm ent, it w as agreed that the Federal Reserve w ould no longer support (by its p u rch ases of governm ent securities) the artificially low interest rates and par values for financing governm ent debt. Thus e n d e d the dom ination of m onetary policy by the Treasury’s n ee d s to finance its m assive war-born debt. The Em ploym ent Act of 19 4 6 affirmed “m axim um em ploym ent” as one of the goals of Federal Reserve policy, establishing formally that m onetary policy has a responsibility to support and help im plem ent national objectives. In m ore recent developm ents, Congress h as delegated addi tional authority to the Fed un d er the C onsum er Protection Act to regu late “Truth in Lending,” “Equal Credit Opportunity” an d other co n su m er interests. Over the years, it b ec a m e clear that m onetary policy had to be uniform throughout the nation, that regional variations w ere not possible. Yet the concept of a “federal” system , with input from various regional perspectives, w as important in the policy process. The establishm ent of the so-called Federal Open Market Com m ittee (FOMC), com bining the Board of Governors and five Federal Reserve Bank presidents as the major policy-making body, represented a major structural innovation that accom m odated the n e e d e d change. I n d e p e n d e n t... F ro m W h o m R epresentative Carter Glass an d his congressional contem poraries w orked out the rem arkably durable provisions of the Federal Reserve Act within the context of our federal system of structural ch eck s an d balances. The term s of the sev en Federal R eserve Board m em b ers ( 14 years*) are not so long or u n ch an g eab le as the life-time 'O r ig in a lly B o a r d t e r m s w e r e 1 0 y e a r s , c h a n g e d to 1 2 y e a r s in 1 9 3 3 a n d to 1 4 y e a r s in 1 9 3 5 . 5 Federal R eserve C hairm an A rthur B urns testified before congressional com m ittees 13 tim es in 1976. Other m em b e rs of the Board a lso m ake frequent a p p e a ra n c e s before Congress. ap pointm ents of justices to the S uprem e Court, but are long enough to m ake the partisan political prospects of a next election substan tially irrelevant. Ultimately the System is accountable to Congress, not the execu tive branch, ev en though Reserve Board m em b ers and the chair m an are president-appointed. The authority and delegated policy pow ers are subject to review by the C ongress—not the president, the Treasury D epartm ent, nor by banks or other interests. B ecause the Federal Reserve System finances its operations from internally gen erated incom e, it d oes not d e p e n d on congres sional budget appropriations. This is an essential elem ent of “insula tion,” since the pow er to appropriate budgets is the pow er to control. This principle w as reaffirmed in the Banking Act of 19 3 5 an d again in the G overnm ent Corporation Control Act of 195 4. 6 The ch eck an d b alance structure extends in other w ays. Direc tors of regional b anks are required to represent borrowers an d the general public as well as b an k s and lenders. The regional structure itself en su res the representation of varied regional interests in econom ic research an d policy formulation, as well as directly on the FOMC. M em bers of the Board of Governors m ust them selves be geographically representative. Finally, an im portant elem ent of insulation results from the ability to h av e policy deliberations conducted in a m an n er an d clim ate that en su res m axim um candor by all staff and officials involved. Alterna tive policies cannot be discussed fully and realistically without such candor. P r e s s u r e s fo r R eform Pressures for reform of the Federal Reserve System stem from three kinds of concerns: (a) disagreem ent with m onetary policy, (b) dis ag reem en t with how the System functions in a procedural context, an d (c) d isagreem ent as to its accountability—to Congress, to the executive branch, to the public. D isagreem ents over m onetary policy are inherent. Knowledge able m onetary experts an d econom ic professionals can an d often do disagree over appropriate action, timing, m ethods of im plem entation and d eg ree of em phasis. Typically, there is m ore disagreem ent over the precise degree of restraint or stim ulus than over the direc tion of policy, w h eth er restraint or stimulus. But disagreem ent over policy is normally healthy disagreem ent. It does not in itself justify reform unless policies are clearly bad, and clearly bad for reasons of structural dysfunction. Critics of m onetary policy often cite the n eed to coordinate m o n e tary with other national econom ic policies: the various agencies of governm ent should not work at “cross-purposes.” Working at cross purposes can be w asteful an d inefficient. It m ay be an indication of bad policy on the part of one ag en cy or on the part of all. But agreed upon policy objectives often conflict in im plem entation—as w hen w e seek m ore “good things” than limited resources can provide, or w h en lower interest rates also m ean m ore inflation. The populist goals of readily available credit at low interest on the one hand, and the d an g ers of rising prices, inflation an d su b seq u en t recession on the other, are the classic issues of m onetary/econom ic policy d eb ate, about w hich there is not only honest argum ent but also inherent conflict. At times, rapid increases in federal expenditures—an d deficits— h av e forced over-reliance on m onetary restraint to curtail inflation. In the context of ch eck s an d balances, it can be prudent to have a sys tem w h ere not all agencies or bran ches of governm ent are required to arrive at the sa m e judgm ent concerning the nation’s econom ic n e e d s an d prospects. 7 Other criticisms stem from the fact that the Federal Reserve Sys tem , as our central bank, is institutionally related to banking—e sp e cially m em b er banks. M ember b anks elect six of the nine directors of each regional Federal Reserve Bank. And each m em b er bank ow ns nom inal stock in its district Federal Reserve Bank. Boards of regional Federal Reserve Banks have been, de facto, largely representative of banking, financial an d business interests—m ore or less by deliberate policy. U nderstandably, the boards of regional Reserve Banks m ust include know ledgeable banking and business leaders, since one of the regional B ank’s major functions is to work jointly with and through m em b er com m ercial b anks in providing financial services to business, governm ent, agriculture an d the district econom y. In practice, this has m ean t that they have not b een specifically representative of the interests of consum ers, organized labor, minor ities, or w o m e n —how ever those interests m ay be defined. But this is in process of change. R ece n t P r o p o s a ls Several suggestions for reform of the Federal R eserve System have b een proposed, so m e of w hich seem acceptable, even if not offering substantive im provem ents. Collectively, they might en h a n c e the public’s understanding of the Federal Reserve as a public institution an d its functioning as the “su p rem e court”of m onetary policy. Among the recent proposals are: • The term of the chairm an of the Federal Reserve Board should be coterm inous with the p resid en t’ Som e have suggested that a s. six or tw elve-m onth overlap w ould be w ise an d in the interest of stability, allowing a new president to be deliberate in selecting a new chairm an. Others note that the current procedure h as not caused problem s an d m ay h av e merits worth preserving. • There sh o u ld be broader representation am o n g district Bank directors. This proposal s e e m s desirable an d in keeping with a legiti m ate concern for the interests of consum ers an d minorities. Historically, educators and farm er-ranchers have been well represented on the M inneapolis Bank’s Board of Directors. Expand ing the n u m b er of board m em b ers—a proposal that w as m ade last y ear—w ould m ak e it possible to ad d persons with a broader range of backgrounds an d experience without losing the contributions of present representation. • The m em ber bank stock arrangem ent sh o u ld be eliminated. This suggestion w ould see m to h ave little material effect. It m ay now b e regarded as an incidental asp ect of m em bership, thought useful at the tim e the Federal Reserve Act w as enacted. It is not an essential m ech an ism for Federal Reserve m em bership, but a useful one and certainly not harm ful in symbolizing the stake an d the participation that com m ercial banking h a s in the central bank process. 8 In contrast, the issue of Federal R eserve m em bership is of major significance. Both equity an d efficiency require that com peting finan cial institutions b e subject to broadly similar reserve requirem ents. This issue b eco m es m ore im portant as other non-bank financial insti tutions (such as savings an d loans) expand their role. • There sh o u ld be fuller d iscu ssio n s of policy deliberations an d m ore im m ediate reporting of FOMC policy decisions an d plans. This recom m endation h as m uch broader significance. More public know ledge an d discussion of Federal R eserve policy would lead to a m ore inform ed public and m ore sophisticated understanding of the issues. Clearly a desirable result. At the sa m e time, reforms should not destroy the freedom of policy m akers to explore and discuss all policy options without the inhibiting influence of exposure to public m isinterpretation or criticism during the formulative process. • There sh o u ld be full a n d frequent reporting to Congress of policy actions a n d expectations. This proposal would seem to be helpful to all concerned. The current procedure of regularly reporting to Congress on the “targets” of m onetary growth has b een generally constructive. Time an d experience with this procedure m ay suggest w h eth er m ore detailed reporting w ould be useful. I n s u la tio n ... h o w it w o rk s Being “in d ep en d en t within” the governm ent m ean s a m onetary function that is insulated from, yet fully aw are of, other essential n e ed s su ch as national defense, foreign policy and trade, resource d e v e lo p m e n t, h o u sin g , a n d e m p lo y m e n t. C o n stru ctiv e policy d eriv es from a stru ctu re w hich c an b e both coordinative an d in d ependent, within governm ent an d also beyond governm ent. It will b e helpful, then, to exam ine such co o p erativ e/in d ep en d ent relationships b etw een the Federal Reserve System and the other elem en ts with w hich it m ust coordinate. T hese include: a. T h e e x e c u tiv e b ra n c h , in c lu d in g th e p re s id e n t a n d his advisors, the Treasury D epartm ent an d other agencies. b. The Congress. c. Banking an d private financial institutions. d. Structural relationships within the Federal R eserve System itself. With th e E x ec u tiv e B ra n c h In d ep en d en ce from the executive branch of governm ent w as a m ain concern during the d evelopm ent of the Federal R eserve System , as it h as b e e n since. Yet it is essential that the m onetary function work in cooperation with the president an d his econom ic advisors an d with the m ajor agen cies of the executive branch, principally the Treasury D epartm ent. Given the pow er an d influence of the presidency, that office can exert strong pressure and influence on any agency. By an d large, 9 presidents h av e b ee n careful not to a b u se this power, respecting the n eed for an in d ep en d en t m onetary authority. Following World War II it ap p ears that President Trum an did, for a time, support the Treasury D epartm ent in its need to finance the public d eb t an d approved the then subordinate role of the Federal R eserve System in supporting that effort. W hen this im passe w as resolved, the Federal R eserve’s responsibility and accountability for m onetary actions w ere restored. Since then, the “in d ep en d en t” relationship b etw een the two agencies has functioned well. There are an y n u m b er of linkages betw een the Federal Reserve an d the econom ic ag en cies of the executive branch. They are formal an d informal an d they function at both the policy and staff levels. The chairm an of the Board of Governors, for exam ple, joins the Secretary of the Treasury, the chairm an of the Council of Economic Advisors, an d the director of the Office of M anagem ent an d Budget in m eetings of the so-called Quadriad. W hen the Federal Open Market Committee takes policy actions w hich it believes to be in the best interest of the nation, it d oes so with full know ledge of the adm inistration’s plans an d objectives. C hairm an. Federal Reserve Board of G overnors Quadriad Secretary of the T reasury C hairm an, Council of E conom ic A dvisors Director of the Office of M anagem ent a n d Budget lO Neither the Treasury nor the Board of Governors should be subordinated to the other. It is vitally necessary, however, that m onetary policy, fiscal policy, a n d all the other econom ic policies of the governm ent should be coordinated so that they will m ake a m eaningful whole, working in the direction of price stability, highlevel em ploym ent, a n d a dynam ic, free-enterprise economy. —from th e congressional S ubcom m ittee of the Joint C om m ittee on the Econom ic Report, 1952 ... A n d th e T re a s u ry The central b an k is in constant contact with the Treasury Depart m ent which, am o n g other things, is responsible for the m an ag em en t of the public d eb t and its various cash accounts. Prior to th e e x isten c e of th e F ed eral R eserve S ystem , the Treasury actually carried out m an y m onetary functions. And even since, the Treasury h as often b een deeply involved in m onetary func tions, especially during the earlier years. At the beginning of World War 11, it ap p eared desirable that the Treasury be able to issue d eb t at relatively low interest cost an d also on a b a s is th a t a s s u r e d p u r c h a s e r s th a t s e c u ritie s w o u ld b e m arketable at near face value. B ecause of the urgency of this need, the policy w as agreed to an d continued after the w ar until 1951. During this period, the Treasury w as, in effect, deciding the m onetary policy of the country as it m ad e its decisions as to how m uch debt n e ed e d to be funded. B ecause the central bank supported the m arket for governm ent securities, it w as forced to purchase am ounts of securities n ecessary to m aintain low interest rates and the par value of securities. Thus, as the Treasury issued additional debt, the central b an k w as forced to acquire part of that debt. This process resulted in direct addition to b an k reserves. Follow ing th e 195 1 acco rd b e tw e e n th e T reasury a n d the Federal Reserve System , the central b an k w as no longer required to support the securities m arket at any particular level. In effect, the accord established that the central bank would act independently and exercise its ow n ju d g m en t as to the m ost appropriate m onetary policy. But it w ould also work closely with the Treasury and would be fully inform ed of a n d sy m p a th e tic to th e T reasu ry ’s n e e d s in m anaging an d financing the public debt. In fact, in special circum stan ces the Federal R eserve w ould support financing if unusual conditions in the m arket c a u sed a n issue to b e poorly accep ted by private investors. i i The Treasury an d the central bank also work closely in the T reasury’s m an a g em en t of its substantial cash p ay m en ts and with draw als of Treasury Tax an d Loan account balan ces deposited in com m ercial banks, since th ese cash flows affect bank reserves. With th e C o n g re s s A seco n d major relationship, of course, is with the Congress—the branch of governm ent that specifically delegated, in the form of the Federal R eserve Act, the responsibility for m anaging m onetary policy in the interests of the nation. At the sa m e time, Congress re tained responsibility for the taxing an d spen d in g decisions of the federal governm ent. W hen the b alan ce b etw een spending an d taxation results in governm ent deficits, the Treasury h as to issue additional public debt. In a m onetary sen se, the failure to tax ad eq u ately to cover the expenditures of the Federal governm ent is an invitation for “printing m o n ey ” through the issuance of federal debt. D epending on the p h a se of the business cycle, this tends to increase the m oney supply and, w ithout offsetting action by the central bank, can result in an inflationary rise in prices. The result is “hidden taxation”—which takes aw ay from taxpayers in the form of lower purchasing pow er (higher prices) w hat they would h av e paid in additional taxes had the ex p en d e d funds b e e n obtained through that source. Thus there is an im portant linkage b etw een the taxing and sp en d in g pow ers of Congress a n d the m onetary pow ers as dele gated to the Federal Reserve System . In principle, it is the job of Con gress an d the executive branch jointly to define the econom ic policy objectives of our national governm ent, and to support those objec tives with appropriate fiscal m easures. Then the central bank can co ordinate m onetary policy in a m an n er w hich serves those national objectives. W hen fiscal policy d o es not m atch spending appropriately to tax revenues, then the m onetary authority is faced with a difficult choice: (a) how severely should it restrain the inflationary forces that m ay develop, an d (b) to w hat extent should it perm it inflationary forces to h av e their effect in higher prices? W hen the failure to provide appropriate tax rev en u es g en erates acute forces of inflation, then ev en the b est com prom ise m ay require sev ere m onetary restraint. This h a s the effect of appearing to be at cross-purposes with congres sional intent an d can also produce severe disruptions in som e areas of the private sector such as housing. Thus, the Congress and the Federal Reserve System m ay not alw ays ap p e a r to agree in their policy actions, but they have a su b stantial com m on interest in coordinating such policies. Monetary policy can be less extrem e w h en fiscal policy is doing “its share.” A nother reason for delegating the m onetary responsibility to an authority not directly a part of the governm ent is the high degree of 12 technical expertise required to analyze econom ic data, trends, and other information related to appropriate m onetary decisions. While the Federal Reserve h as b e en called the m onetary “ag en t” of Con gress an d is subject to its ultim ate control, its special responsibilities require a separation in carrying out its unique functions. Congress can n o t effectively legislate day-to-day m onetary decisions, nor even provide operating m andates. In the dialogue b etw een the Congress and the central bank, both the intent of the national policy an d the rationale for appropriate m onetary policy m ust be com m unicated. To accom plish this, the Federal Reserve System reports regularly to the Congress with regard to its conduct of m onetary policy. Over the years, exhaustive h earin g s h a v e b e e n held by the S e n a te a n d H ouse b an k in g com m ittees regarding the functions an d procedures of the Federal Reserve System . The Joint Economic Com m ittee an d other com m ittees of Congress frequently call on Federal Reserve representa tives to discuss both policy an d operational matters. With B a n k in g A third area of in d e p en d e n ce relates to com m ercial banking and other private financial institutions. It w as no accident that the Federal Reserve System w as struc tured to include direct representation from com m ercial banking, for without a so u n d banking system m onetary policy could not operate. W hen the central bank takes action to restrict or expand the m oney supply, the multipliers set in motion are leveraged through the banking sy stem —often to the discomfort of bankers them selves. W hen m onetary policy is restrictive, the restrictive action takes place at the loan d esk s of com m ercial b anks w here, with greater d em an d for funds and limited m oney to lend b eca u se of the restrictive policy, ban k ers are forced to decline so m e loans that both they an d their Congress, recognizing that restrictive m onetary policies m u st som etim es be strongly stated to control inflation, h a s chosen to endow the System with a considerable degree of independence. But under the Constitution this independence can never rise above the relationships of a faithful a n d trustworthy servant a n d a responsible, watchful master, in this case the Congress. —R epresentative Wright P atm an, 1 9 5 4 13 custom ers might otherwise consider prudent. Thus is expansion of the m oney supply restrained. All national banks and m any state-chartered b an k s are m e m bers of the Federal Reserve System . It is essential that the majority of bank deposits in the country be subject to Federal R eserve require m ents in order that the reserve m ech an ism s for controlling the m o n ey supply can function well and equitably. In addition, the central b an k is charged to perform other services for m em b er banks such as supplying coin and currency, clearing checks, transferring funds, an d m aking loans to m em ber b an k s under special circum stances. T hese services require direct working relationships with com m ercial banks. The Federal R eserve’s supervisory role (and also the central b a n k ’s ultimate role as the lender of last resort) reflects both the public need and the m onetary n eed for so und banking. Through all these close ties an d relationships, it is essential that the central b an k deal “at arm ’s length” with com m ercial banking in general an d that it not be dom inated or m a d e subservient to banking interests. This also has been a major concern of Congress over the years an d is a concern that is reflected in its design of the Federal Reserve Act. It is one of the reasons w hy the Federal R eserve’s bank supervision an d regulatory functions are structurally accountable to the Federal Reserve Board rather than to regional b an k boards. W ithin Itself One other area in which sep arate n ess an d in d e p e n d e n c e have significant m eaning is within the Federal R eserve System itself. As originally conceived, the regional Federal R eserve Banks w ere largely autonom ous: a federation of regional institutions m ad e up the Federal Reserve System. As time an d experience brought chan g es, it b e ca m e necessary to coordinate m onetary policy on the national level, while continuing to perform central bank services for m em b er banks, including the discount (lending) function at the regional level. Regional Federal Reserve b anks are regularly exam ined by the Board of Governors to confirm the internal quality an d integrity of each B ank’s operations and also to en su re that regional Banks are com plying with all statutory regulatory requirem ents of the System . An im portant feature within the Federal R eserve is that the chair m an of the Board of Governors, though sp o k esm an for both the seven-m an Board and the Federal Open Market Comm ittee, d oes not h av e in d ep en d en t authority. He cannot establish policy himself nor control policy decisions. He is subject to an d limited by the majority vote of the councils of which he is part. Thus, there exists within the System itself ch eck s an d balan ces w hich limit the authority and the pow er of its different elem ents. T hese relationships are significant w h en structural c h an g es are u nder consideration. 14 The Board subm its regular a n d frequent reports to C ongress on econom ic data a n d financial matters. Indeed, the detail in which financial data are p ublished is greater than for any other central bank in the world. —Arthur Burns, congressional testim ony in January 1 9 7 6 P e rs p e c tiv e s o n In d e p e n d e n c e Our central b an k structure—functioning in an environm ent reaso n ably insulated from the day-to-day pressures of partisan politics and short-term ex p ed ien cy —w as born out of d e c a d e s of experience with b o o m /b u st recessions, financial panics, an d m onetary instability. Over the years, the System and its vital m onetary function have b e e n u n d er co n stan t scrutiny and review by Congress, by profes sional econom ists, by banks and financial experts as well as by the public. H earings by S enate and House banking com m ittees on F e d e ra l R e se rv e resp o n sib ilities a n d p ro c e d u re s h a v e b e e n exhaustive. Such studies h av e produced innum erable ch an g es in respon sibilities, authority an d procedures. It is through su ch efforts that our m onetary m ech an ism s have kept pace with the changing n eed s of the tim es. While m an y problem s persist, it is also true that over the p a st th re e d e c a d e s —a n d d esp ite so m e pretty difficult tim es— recessions h av e b e e n m oderate, and severe panics and disruptions h av e b e e n largely avoided. W hether the proposals currently suggested are useful rem ains to b e se en . But the role of the Federal Reserve System in carrying out the exacting responsibilities of m anaging the nation’s m onetary policy re q u ire s th e b est structural an d p ro ced u ral fram ew ork p o ssib le to d o th at job. The record su g g e sts th at a d e g re e of “in d e p e n d e n c e ” is essential for effective execution of its m onetary role. T here is a recognized need for professionalism in analysis and formulation of policy—free of p artisan/expediency considerations an d free of distraction from other responsibilities. Urgent a n d changing econom ic needs call for frequent review, evaluation, a n d suggestions for reform—relying on the tested lessons of p ast ex p erien ce a s w e learn to understand an d cope with new ch an g es. 15 A System that provides responsible policy m ust serve the broad public interest, rem aining objective a n d rem oved from special interest, yet ultimately accountable to a n d in dialogue with the realities of changing times, h u m an values, an d econom ic conditions. President *Robert w. Worcester, vice president at the Federal Reserve Bank of Minneapolis, provided valuable assistance in preparing this text for publication. 16 1976 in Review Each y ear the Bank develops a set of objectives to identify those efforts w hich, in the judgm ent of m anagem ent, constitute the B ank’s m ost im portant n ew undertakings for the com ing year. As a part of this process, a m ore detailed structure of sub-objectives is developed by the various d ep artm en ts of the Bank w hich directly supports th ese m a n a g e m e n t level priorities and in other w ays contributes to the B ank’s longer-term m issions identified in its statem ent of goals. Over the past few years, our bank objectives have focused increasingly on the efficiency and effectiveness of internal op era tions: in 1 9 7 6 four of five Bank objectives w ere internally oriented. This em p h asis reflects the S ystem ’s determ ined effort to m ake Federal R eserve Banks both efficient and productive in keeping with the b est applications of good m anagem ent and available tech nology. S u ch co n sid eratio n s m ust alw ay s be w eig h ed ag ain st service n e e d s of the financial com m unity, our role in serving the public interest a s the nation’s central bank, and our responsibilities for setting national m onetary policy. The stated Bank objectives for 1976 and a sum m ary review of ach iev em en t are set forth below. To limit the increase in total net controllable expensesfor 19 7 6 to 8 percent above net controllable expenses in 1975. This objective w as achieved as net controllable ex p en ses in 1 9 7 6 w ere 7.2 p ercent above net controllable ex p en ses in 197 5 . Net controllable ex p e n se s are those costs rem aining after excluding cost item s over w hich m an ag em en t has very limited short-run control (e.g., real estate taxes, building depreciation, new currency costs, etc.). This w as accom plished in spite of increasing costs, normal volum e in creases w hich w ere approxim ately 7 percent above 19 75 levels, and n ew responsibilities in so m e functions such as increased activity related to consum er protection legislation. The prim ary offset to th ese factors w as the continuing effort on the part of the Bank to hold the line on ex p en ses through productivity and efficiency in the various operating an d support areas, mainly by im proved technology and procedures. Contributing to this continuing effort h a s b e en the developm ent of m an ag em en t talent and tools. Salary ex p en ses, which constitute over 5 0 percent of control lable ex p en ses, increased by 7.3 percent — exactly the figure projected. The total Bank staff declined just slightly for the year. 17 To com plete scheduled deuelopm ent a n d im plem entation of the new Federal Reserve Planning a n d Control System (PACS)at M inneapolis an d Helena. The new Federal Reserve Planning an d Control System is desig n ed to facilitate planning, budgeting, an d e x p en se control throughout the Federal Reserve System, in 19 7 6 efforts w ere directed to the d evelopm ent and im plem entation of the internal ex p en se accounting an d reporting com ponent of the system . In addition to providing better internal ex p en se and b udget information for Bank an d line m anagem ent, the new system will also provide im proved com parability am ong Reserve Banks for ex p en se an d productivity data. The ex p en se accounting and reporting co m p o n en ts h av e b een im plem ented during 19 7 6 and began fully functioning on January l of 1977. D evelopm ental work on the entire Planning an d Control System will continue through 1977. To rank above the first quartile in all currently m onitored production a n d cost areas according to the 19 7 6 a n n u al System ranking, while allow ing no deterioration of System ranking in those areas representing l.o percent or m ore of total controllable costs. B ecause of the unique nature of our central b an k operations and functions, m any of the com m on w ays of m easuring organizational ach iev em en t—profit, share of market, or return on equity—are not available to us. Thus, w e look to other m easu res an d stan d ard s as proxies to a sse ss our operational effectiveness. One of th ese is by com paring our efficiency and productivity with the other 1 1 Federal R eserve Banks, all of w hom are providing essentially the sam e kinds of services. At the en d of 19 7 5 the Bank’s perform ance, in five of so m e two dozen operational areas in which w e can b e co m p ared with other Reserve Banks, show ed that w e ranked in the low est quartile—tenth, eleventh, or twelfth—in term s of either productivity or cost. Our objective w as to concentrate on im provem ent in those areas w here relative m easu res indicated m ost im provem ent w as need ed , while ex p erien cin g no deterioration in p erfo rm an ce else w h e re . Infor m ation available in January 1977 indicates that our objective w as achieved in four of the five areas. To develop an d im plem ent a com prehensive training a n d developm ent program for Bank officers a n d staff which will set guidelines for participation in various types of developm ental program s. During 19 7 6 our efforts toward this objective focused principally upon developing an operating fram ew ork for an integrated staff d ev elo p m en t an d training program —o n e that helps us identify 18 B ankw ide training an d developm ent n eed s an d also the best vehicles to m eet those needs. T his fra m e w o rk o u tlin e s th e v ario u s lev els a n d ty p e s of d e v e lo p m e n t p ro g ram s a n d their relationship to the identified training needs. While full d evelopm ent of the total program outlined will extend into 1 9 7 7 an d beyond, a num ber of im portant elem ents w ere im p lem en ted in 1976. These include in-house supervisory and m a n a g e m e n t training, presentational speaking, and better use of various m a n a g e m e n t schools. During the y ear w e com pleted the com prehensive redesign of our job evaluation structure and procedures, including a com pletely n e w s e t of jo b d e sc rip tio n s, n ew g ra d e stru c tu re s, a n d final reevaluation of all non-official jobs. Our Bankw ide perform ance review program , an d formalization of job-posting procedures, w ere also modified during the year. To com plete research stu d ies identifying public policy problem s relevant to the Ninth District an d developing p ro p o sals for a c tio n s to c h a n g e law s of regulative p ro ced u res affecting: (a) E F T s y s t e m s d e v e lo p m e n t th ro u g h o u t th e D istrict, (b) state banking structure an d perform ance (Minnesota only, this year) a n d (c) risk exposure and contingency p rep ared n ess of larger b an k s in the District. in general, the studies done in furtherance of this objective have provided the public an d this Bank with a basis for evaluating current public policy issues. Four background studies in the area of electronic funds transfer (EFT) w ere p ro d u ced by various departm ents of the Bank during 1976: 1. A Survey of Significant EFT D evelopm ents in the Nation a n d the Ninth Federal Reserve District 2. EFTS: Public Policy Issues 3. C o m p e titiv e A s p e c ts of E le c tr o n ic F u n d s T r a n s f e r System s 4. L egal D im e n sio n s of E lectronic F u n d s T ran sfer in th e Ninth District E x e r p ts fro m th e first tw o s tu d ie s w e r e p u b lis h e d in the Ninth District Quarterly and the first paper w as published in full as part of our EXPONENT series, entitled, Electronic F unds Transfer: The Future is Now. A co n d en sed version of the third pap er exam ining ch a n g e s in the com petitive relationships am ong financial institu tions that m ay result from EFT system developm ents is sch ed u led for publication early in 1977. The fourth study rem ains an internal w orking d o cum ent. Two stu d ies on state banking structure are being published early in 1977. T he first—“The Philadelphia National Bank Case Revisited”— 19 review s the analysis used by the S uprem e Court in its landm ark decision (1973) concerning the Philadelphia National Bank. A key asp ect of that decision w as that com m ercial banking w as con sidered a distinct line of com m erce. The appropriateness of this definition, b ased on a type of institution rather than a type of service offered, is looked at in light of the changing environm ent in w hich financial institutions are increasingly com peting across traditional lines. The second study is a follow-up to an earlier publication by this Bank w hich characterized M innesota’s banking structure as “ex cep tional.” This follow-up, which takes into account a broader array of financial institutions in the state, and a com parison with different states, generally finds that the structure of financial institutions in M innesota is not exceptional if com pared with states w h ere branch banking is permitted. Over the past two years w e have b een in touch with the larger Twin Cities banks concerning contingency plans for dealing with possible runoffs of interest sensitive funds. A form w as devised and tested by a n u m b er of these banks that w ould show the exposure of the bank to such runoffs under various hypothetical situations. Variations of this contingency approach h av e b een ad o p ted by som e Twin Cities banks. Operational Highlights In addition to the progress achieved on special B ankw ide objectives, other operational and staff developm ents are sum m arized below. • Gross earnings of the Minneapolis Federal Reserve Bank for 1976, consisting mainly of interest on U.S. G overnm ent an d Federal ag en cy securities, w ere $ 1 4 5 .4 million, up $ 1 2 .5 million from 1975. Net total ex p en ses w ere $ 2 6 million in 1976, up 9.2 percent. This includes an increase of $ 8 0 7 ,0 0 0 in the cost of printing Federal Reserve currency. The statutory 6 percent dividend paid to m em b er b an k s on their required holding of Reserve Bank capital stock totaled $ 1,643,000. The Bank’s surplus w as increased by $ 2 ,4 9 7 ,0 0 0 , an d the b alan ce of net earnings, $ 1 1 4 million, w as paid to the United States Treasury as interest on Federal Reserve Notes. • Conventional check volum e at M inneapolis increased 6 percent, from 5 1 2 million items in 19 7 5 to 5 4 2 million item s in 19 7 6 , averaging about two million checks each working day. Efforts to cope with this growing volum e include continued autom ation of the check clearing process a n d step s to reduce the growth of ch eck s as a m e a n s of m o n ey transfer. 20 During 19 7 6 the Regional Check Processing Center at our Bank w as e x p a n d e d to include an additional 41 Wisconsin banks. It now includes all b an k s within a 7 5 mile radius of Minneapolis, plus major cities su ch as Eau Claire, La Crosse, Rochester, Austin, Willmar, St. Cloud, Duluth, an d Superior. More than 7 0 percent of the dollar volum e of ch eck s draw n on banks in the Minneapolis territory are eligible for im m ediate (sam e day) credit to the depositing bank. The Duluth Regional Check Clearing Arrangem ent, com m only called the Duluth Plan, w as in operation for the full year 1976, handling an a v erag e of 2 0 ,0 0 0 items per day w hich w ere formerly p ro cessed at the Minneapolis Fed. The Duluth Plan, including the Iron R ange an d northw estern Wisconsin, now serves about 5 5 banks. A utom ated clearing house (ACH) operations in 19 7 6 saw further e x p a n s io n in b o th c o m m e rcial en trie s a n d F e d e ra l recu rrin g p ay m en ts. In the latter category, Social Security p aym ents and several other sm aller program s w ere ad d ed to our initial program of processing Air Force payrolls. • District-wide distribution of the new $2 currency denom ination w as initiated early in the year as part of the national effort to re-institute the u se of the $2 denom ination. The objective is to reduce the total n u m b er of bills in circulation with com m ensurate reductions in printing an d handling costs. The Treasury D epartm ent is considering other c h a n g e s in coin denom inations and usage that m ay further en co u rag e $2 bill usage. Minting of bicen ten n ial-d esigned q u arters, half-dollars, an d dollars, first issued in 1975, will be discontinued in 1977. Overall currency and coin volum e increased during 1 9 7 6 by roughly l o percen t for currency handling and by 14 percent for coin. • The volum e of Treasury securities issues and redem ption rose m arkedly during 1 9 7 6 reflecting the major increase in Treasury financing over the past two years. The dollar volum e of issues redem ption an d exchanges roughly doubled over 1975, an d the n u m b e r of transactions w as up one-fifth. Late in the year, the Treasury D epartm ent began issuing 52w eek Treasury bills on a book-entry-only basis. This significant step will b e ex ten d ed to other bill issues in 19 77 and eventually to other types of Treasury securities. • With the grow ing complexity of consum er-related regulations, the Bank h a s had to increase its efforts to provide information to co n su m ers an d others about such regulations. Bank representatives sp o k e to approxim ately l ,8 0 0 people on the Equal Credit Opportunity Act, Fair Credit Billing Act, and The Federal Trade Com m ission’s Holder in-Due C ourse Regulation. Our c o n su m e r specialists also an sw ered telep h o n e inquiries from bankers an d investigated all co n su m er com plaints involving state m em ber banks. • L ate in 1 9 7 6 tw o experim ental m eetin g s w ere held with m e m b e r b an k ers in Michigan an d Wisconsin to (a) u p d ate m em ber 21 b an k s on recent developm ents in R eserve Bank services and program s, an d to (b) provide a forum for b an k ers to express their views, suggestions, and criticisms about Fed operations an d services. T hese m eetings, which w ere d e em ed productive, will b e continued in 1977. Our series of informational conferences for bank directors (started in 1974) w as continued in 1 9 76 with m eetings in Rapid City an d Sioux Falls. Similar conferences are p lan n ed for 1977. 22 F e d e ra l R e s e rv e B a n k o f M in n e a p o lis F in a n c ia l S ta te m e n t S ta te m e n t o f C o n d itio n (In T h o u sa n d s) D ecem ber 31 1976 1975 A ssets Gold Certificate Account ....................................... In te rd istric t Se ttle m e n t F u n d ................................ Sp ecial D ra w in g R ig h ts Certificate Account . . . Fe d e ra l R e se rv e N otes of Other Fe d e ra l R e se rv e B a n k s ...................................... O ther C a sh .................................................................. L o a n sto M e m b e rB a n k s ....................................... S e c u r it ie s .................................................................... Fe d e ra l Agency O bligations ............................ U.S. G o vernm ent S e c u r it ie s .............................. To ta l S e c u ritie s ..................................................... Cash ite m s in P ro c e s s o f C o lle c tio n ..................... B a n k P re m ise s N e t................................................... O ther A s s e ts .............................................................. To ta l A s s e t s ........................................................ $ 22 1,457 229,951 2 4 ,0 0 0 26,922 13,863 — $ 2 0 5 ,4 8 9 3 0 2 ,1 3 9 10,000 4 3 ,4 8 6 15,10 9 4 1,875 155,333 2,13 2,514 132,619 1,894,025 2,287,847 4 5 4 ,022 30,9 3 9 43,01 l 2,02 6,644 4 9 8 ,5 7 1 32 ,3 9 9 33 ,0 4 4 $3,332,0 12 $3,2 0 8 ,7 5 6 Fe d e ra l R e se rv e N o t e s ........................................... D e p o sits M em ber B a n k R e se rv e A c c o u n ts................... Due to Other Fe d e ra l Re se rve Banks-C ollected F u n d s .................................... U.S. Tre a su ry-G e n e ra l A cco unt........................ Fo re ig n .................................................................... O ther D e p o s it s ....................................................... $ l ,749,458 $ 1,586,070 6 0 4 ,1 8 5 7 0 7 ,6 8 7 4 2,3 37 3 9 8 ,2 4 5 6,6 0 0 19,657 3 67 ,4 1 2 6,302 5 ,24 6 To ta l D e p o s its ......................................................... D eferred A v a ila b ility Cash It e m s ........................ O th e rLia b ilitie s ......................................................... l ,0 7 1,024 4 3 2 ,4 8 3 2 1,867 1,086,647 4 5 8 ,7 4 7 25,1 0 6 To ta l L ia b ilit ie s ................................................... $3,2 74,83 2 $3,1 5 6 ,5 7 0 Capital Paid I n ............................................................ S u r p lu s ........................................................................ 2 8,5 90 2 8,5 90 26.0 93 26 .0 9 3 To ta l Capital ....................................................... To ta l L ia b ilitie s and Capital A c c o u n ts....... 5 7 ,1 8 0 $3,3 32,01 2 5 2 ,1 8 6 $3,2 0 8 ,7 5 6 Liabilities CMpital A ccounts 23 E a rn in g s a n d E x p e n s e s (In T h o u s a n d s ) For the Year E n d ed D ecem ber 31 1975 1976 Current Earnings S In te re st on L o a n sto Mem ber B a n k s ................... Intere st on U.S. Governm ent Se c u ritie s and Federal Agency O b lig a tio n s....................... A llO th e rE a rn in g s ..................................................... 173 $ 2 17 144,368 82 1 145,362 132,890 14,782 2,8 4 5 474 874 1,587 13,171 2,702 355 912 1,500 1,879 1,566 425 1,532 1,522 T o ta lC u rre n tE a rn in g s .................................... 132,326 347 1,950 1,566 414 1,827 715 Current E xpenses Sa la rie sa n d Other B e n e fits .................................... Postage and E x p re ssa g e ....................................... Te le p h o n e and T e le g ra p h .................................... P rin tin g a n d S u p p lie s ............................................. Real Estate T a x e s ..................................................... F u rn itu re and Operating Eq u ip m e n t—P u r chases, Rentals, Depreciation, Maintenance .. Depreciation—B a n k P r e m is e s ............................ U t ilit ie s .......................................................................... Other Operating E x p e n s e s .................................... Federal R e se rve C u rre n c y .................................... To ta l Current E x p e n s e s .................................. E x p e n se s R e im b u rsa b le or Recoverable . 2 7 ,4 8 6 ( 1,437) 25,1 12 (1,31 7) N e tE x p e n se s ..................................................... 2 6 ,0 4 9 2 3 ,7 9 5 Current Net Earnings ....................................... Net Profit (or L o s s ) ................................................... A sse ssm e n t for E x p e n se s of Board of G o vernors ............................................... D iv id e n d s P a id .......................................................... P a ym e n ts to U.S. T re a s u ry .................................... 1 19,3 13 374 109,095 (4,9 18) ( 1,1 76) ( 1,643) ( 1 14,37 1) (818) (1,387) (97,610) Tra n sfe rre d to S u rp lu s .................................... S u rp lu s, January 1 ................................................... 2,497 2-6,093 4,362 2 1,731 S u rp lu s,D e c e m b e rs l ........................................... $ 2 8 ,5 9 0 $ 2 6 ,0 9 3 V o lu m e o f O perations* For the Year E nded D ecem ber ;i I N um ber 197(3 Dollar A m ount 10 7 5 223 290 L o a n sto M e m b e rB a n k s ................ C urrency Received a n d Verified . 145 million 12 8 million C o in R e c e iv e d a n d C o u n te d ........ 5 3 8 million 481 million C hecks H andled, T o ta l.................... 6 1 4 million 5 8 2 million .3 million .4 million Collection Item s H a n d le d .............. Issues, R edem ptions, E xchanges ofU .S .G overnm entS ecurities. . . 9.0 million 7.6 million 4 4 9 .5 2 6 4 3 2 ,0 5 4 Securities Held in S a fe k e e p in g ... 6 2 7 ,3 4 7 7 8 5 ,3 3 1 T ransferof F u n d s .............................. 1976 1075 $ 4 6 6 million $ 6 9 0 million 9 7 1 million l.l billion 7 0 million 7 5 million 1 6 0 billion 177 billion 1.3 billion 1.4 billion 5 2 .4 billion 9 .4 billion 5 7 6 billion 2 8 .4 billion 8 .0 billion 4 9 5 billion 'M i n n e a p o l i s a n d H e l e n a c o m b i n e d 24 Directors of the Federal Reserve Bank of Minneapolis J a n u a ry 1 9 7 7 T erm e x p ire s D e ce m b er 3 1 o f in d ic a te d y e a r Jam e s P. McFarland, Chairm an and Federal Reserve Agent S tep h en F. Keating, Deputy Chairman C lass A—Elected by Member Banks William E. Ryan, President (1977) Citizens State Bank, Ontonagon, Michigan John S. Rouzie, President (1978) First National Bank, Bowman, North Dakota Nels E. Turnquist, President (1979) National Bank of South Dakota, Sioux Falls, South Dakota C lass B—Elected by Member Banks Donald P. Helgeson, Secretary-Treasurer ( 1977) Jack Frost, Inc., St. Cloud, Minnesota Russell G. Cleary, Chairm an an d President (1978) G. H eilem an Brewing Com pany, Inc., La Crosse, Wisconsin W arren B. Jones, Secretary-Treasurer (1979) Two Dot Land & Livestock Com pany, Harlowton, Montana C lass C—A ppointed by Board of Governors S tep h en F. Keating, Chairm an (1977) Honeywell, Inc., Minneapolis, Minnesota Jam e s P. M cFarland, Chairm an (1978) G eneral Mills, Inc., Minneapolis, Minnesota Charles W. Poe, Jr., President (1979) Metropolitan Econom ic D evelopm ent Association (MEDA) M inneapolis, M innesota M ember of Federal Advisory Council Richard H. V aughan, President N orthwest Bancorporation, Minneapolis, Minnesota Directors of the Helena Branch Patricia P. Douglas, Chairm an Norris E. Hanford, Vice Chairm an A ppointed by Board of Directors Federal Reserve Bank of M inneapolis Donald E. Olsson, President (1977) Ronan State Bank, Ronan, Montana William B. A ndrew s, President (1978) N orthw estern Bank of Helena, Helena, Montana George H. Selover, President & General M anager (1978) Selover Buick-Jeep, Inc., Billings, Montana A ppointed by Board of Governors Norris E. Hanford, in d ep en d en t grain operator (1977) Fort Benton, M ontana Patricia P. Douglas, Assistant to President and Professor ( 19 7 8 ) University of M ontana, Missoula, Montana 25 Officers of the Federal Reserve Bank of M inneapolis J a n u a ry 1 9 7 7 Bruce K. MacLaury, President Clem ent A. Van Nice, First Vice President T hom as E. Gainor, Senior Vice President Roland D. Graham , Senior Vice President John A. MacDonald, Senior Vice President Melvin L. Burstein, Vice President and General Counsel Frederick J. Cramer, Vice President Leonard W. Fernelius, Vice President Lester G. Gable, Vice President Bruce J. Hedblom, Vice President Douglas R. Hellweg, Vice President Howard L. Knous, Vice President and General Auditor David R. McDonald, Vice President Clarence W. Nelson, Vice President an d Director of Research Robert W. Worcester, Vice President S heldon L. Azine, Secretary and Assistant Counsel Earl O. Beeth, Assistant Vice President Jam es u. Brooks, Assistant Vice President Phil C. Gerber, Assistant Vice President Gary P. Hanson, Assistant Vice President Richard C. Heiber, Assistant Vice President William B. Holm, Assistant Vice President Ronald E. Kaatz, Assistant Vice President Michael J. Pint, Assistant vice President an d Assistant Secretary Ruth A. Reister, Assistant Vice President an d Assistant Counsel Charles L. Shromoff, Assistant Vice President Colleen K. Strand, Assistant Vice President Richard B. Thom as, Assistant Vice President Joseph R. Vogel, Chief Examiner Officers of the Helena Branch John D. Johnson, Vice President Ronald O. Hostad, Assistant Vice President Betty J. Lindstrom, Assistant Vice President 26 F o r additional copies: Office of Pu b lic Info rm a tion Fe d e ra l R e se rv e B a n k of M inneapolis M innea p olis, M innesota 5 5 4 8 0 Illustrations a d a p te d w ith p e rm issio n of the N ational G eographic Society