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Federal Reserve Bank
of Minneapolis

Annual Report 1980

A N ew Law, A New Era


Federal Reserve Bank
of Minneapolis

Annual Report 1980


Federal Reserve Bank
of Minneapolis

Annual Report 1980

A Message From the President

By virtually any standard, the year 1980 was an ex­
traordinary one in terms of economic and financial
developments. One of the more significant of the
developments during the year was the enactment
of “The Depository Institutions Deregulation and
Monetary Control Act of 1980.” That legislation will,
over a period of time, have major implications for
the role and structure of the Federal Reserve and
for the role and structure of our banking and related
markets more generally. Because of this, most of
the Annual Report of the Federal Reserve Bank of
Minneapolis for 1980 is devoted to a consideration
of some of the longer-term implications of this
landmark legislation.
However, there was much more to 1980 than the
passage of this important new legislation. Early in
the year a combination of events including sharply
higher oil prices, indications of significant political
disturbances in the Mid-East and elsewhere, and
uncertainties about the course of fiscal policies
here in the United States resulted in a pronounced
acceleration of inflation and inflationary expec­
tations. Indeed, while memories are short, it was
only a year ago when it seemed to some observers
that the economy was on the threshold of a classical
inflationary outburst.
Fortunately, that situation was arrested and con­
tained, but at the expense of having to resort to
credit controls and levels of interest rates that were
unprecedented in this nation’s history. And there
can be little doubt that the reactions of households
and businesses to both credit controls and 20 per­
cent interest rates helped to trigger the very sharp—
but short-lived—decline in economic activity that
occurred in the second quarter.
Over the second half of the year economic activity
rebounded from the second-quarter drop and
advanced sharply toward year-end. In fact, virtually
all observers were surprised by the strength of the
economy in the fourth quarter when real output ex­
panded at an annual rate of 4 percent. However, the
resurgence of economic activity combined with
sizable borrowing needs by the Treasury—coup­
led with the Fed’s policy of seeking restraint in the
growth of money— interacted to produce strong
pressures in the financial markets which reflected
themselves in levels of interest rates that ex­
ceeded the peaks reached in late March and early

Obviously, 1980 was a difficult year for monetary
policy. Sharp swings in economic activity, highly
volatile financial markets, and ever-sharpened and
heightened expectational forces interacted to
produce an environment in which market percep­
tions about the Federal Reserve’s performance and
its intent were subject to recurring questions.
Fundamentally, the Federal Reserve’s policy objec­
tive has been, and will continue to be, aimed at
achieving a continuing reduction in the growth of
money and credit. The year 1980 witnessed a fur­
ther measure of success in achieving that objective
as the narrow measures of money (adjusted for
deposit shifts arising from ATS and NOW account
growth) increased at about a 6.5 percent annual
rate, down from the 8 point growth in 1978. And for
the year 1980 as a whole, narrow money growth
was just a shade above the upper end of the growth
targets established by the Federal Reserve for the
However, growth patterns in both money and inter­
est rates during the year were subject to consider­
able short-run volatility. While much of that volatility
can be explained by factors such as the imposition
of credit controls, the transitory and often simul­
taneous swings in both money growth and interest
rates serve to bring into sharp focus one of the
policy dilemmas faced by the Federal Reserve.
On the one hand, some would argue that the Fed
should work to smooth out even very short-run
swings in money growth—a goal that could be
achieved only at the expense of even greater shortrun volatility in interest rates. Others argue that the
Fed has permitted too much variability in interest
rates, and in the process has “permitted” rates to
reach levels that are unnecessary and have a very
uneven impact on various sectors of the economy.
Obviously, we can’t have it both ways. At the same
time, there may be opportunities to improve the
mechanics of policy with a view toward trying to
minimize these short-run problems. The Federal
Reserve is evaluating these enhancements, but as
we proceed, I believe that it is important that market
participants and others recognize that these transi­
tory developments should be kept in a proper
perspective. In this regard, it is worth noting that the
short-run variability of money growth in the United
States over the past couple of years has been
demonstrably less than is the case in other coun­
tries, including both Germany and Switzerland.


The challenges faced by the Federal Reserve in
1980 will not subside in 1981. Our monetary policy
objectives for this year call for a further reduction in
the rate of growth in money—a step consistent with
our longer-term goal of bringing the growth in
money down to levels compatible with a noninflationary economy. Unfortunately, the popular money
supply measures will, to an extent, mask the true
rate of growth in money. That is, because of siz­
able shifts in deposits arising from the nationwide
introduction of NOW-type accounts, the regularly
published statistics on the money supply will give
false signals. The Fed will, from time to time, make
and publish adjustments in these series, but even
so, the opportunities for confusion and misunder­
standing are great.
On a more optimistic note, there are growing indi­
cations that fiscal policy may be brought to bear in
a more decisive way in the fight against inflation.
The new Administration has put forth an ambitious
program of spending reductions and tax policy
changes which, over time, offer some promise for
achieving greater discipline in our fiscal affairs.
That result, if achieved and maintained, can greatly
assist in the difficult but necessary task of beating
back inflation. Indeed, cohesive, coordinated, and
credible fiscal and monetary policies, working in
tandem, are the key to our ultimate success in
checking inflation and thereby restoring an overall
economic and financial environment that is compatable with achieving sustained prosperity.

E. Gerald Corrigan
Federal Reserve Bank of Minneapolis

Federal Reserve Bank
of Minneapolis

Annual Report 1980


A Message From the President
A New Law, A New Era
1980 Operating Highlights
Statement of Condition
Earnings and Expenses
Volume of Operations





Federal Reserve Bank
of Minneapolis

Annual Report 1980


A New Law, A New Era

In recent years, a combination of factors, including
technological change, inflation, high and variable
interest rates, the increased financial sophistication
of economic agents, large and small, and our regu­
latory structure have interacted to promote vigorous
and rapid changes in the financial environment. For
example, new markets, new institutions, and new
financial instruments have sprung up, and the asset
and liability management practices of households,
businesses, and financial institutions have
changed appreciably. Because of these changes,
there was a growing realization as the 1970s drew
to a close that our existing laws and regulations no
longer served the purposes for which they were
originally designed.
This pattern of change was a major factor which
prompted Congress to develop a series of changes
in our national banking laws that were forged to­
gether into The Depository Institutions Deregulation
and Monetary Control Act of 1980, which the Presi­
dent signed into law in March of that year. It had two
main goals: one, to enhance the Federal Reserve’s
ability to implement effective monetary policy and,
two, to promote greater competition, less regulation,
and greater efficiency in the provision of bankingrelated financial services. There can be no guaran­
tee that these goals will be wholly achieved, but
there can be no doubt that the new legislation
brought our laws into much better alignment with
the current realities of our ever-changing financial

percentage of deposits that were subject to Fed
reserve requirements. The shrinkage in Fed mem­
bership thus threatened to seriously undermine the
already loose and fragile relationship between Fed
policy actions and the behavior of money and
credit—possibly even over long periods of time.
The decline in the share of the nation’s deposit
balances held by banks that were members of the

The enactm ent o f the law gave a d e ar
signal— both here and abroad— as to
the importance we as a nation place on
a strong and independent central bank.
In that regard, it is noteworthy that m ost
national banking and thrift industry trade
groups supported these broadened
powers for the Fed, even though in
many instances their affiliated institu­
tions would be, for the first time, faced
with the burden o f reserve requirements.
That affirmation as to the need for a
strong central bank represents, we
believe, a recognition that solutions to
our economic problem s while never
would be considerably more
difficult if m arket or other forces altered
the "independence within government
that has been a hallmark o f our central
bank for alm ost seven decades.



Enhancing Monetary Control

Key provisions of the new financial legislation will
work to enhance the ability of the Fed to implement
its monetary policies. This potential improvement in
monetary control will result in large part from the
broader and more uniform reserve requirements
mandated in the legislation. This reverses a trend in
the financial industry which had led to a dramatic
deterioration in the number of institutions and the


Federal Reserve Bank
of Minneapolis

Federal Reserve System and hence subject to Fed
reserve requirements reached alarming pro­
portions in the late 1970s. Ironically, the decline in
the amount of reserves controlled by the Fed was
aggravated by the existence of the Fed’s reserve
requirements. Since member banks could not earn
interest on their required reserves, they were sub­
jected to a cost that was often substantial. Their
cost was the amount of interest earnings they had
to forego on their reserve balances. Bankers who
concluded that this cost was not offset by the bene­
fits of Fed membership would drop out of the
Federal Reserve System. In recent years, the cost of
Fed membership became increasingly heavy in the
climate of high interest rates. This caused a growing
number of banks to relinquish their Fed member­
ship, resulting in a decline in the amount of deposits
subject to Fed reserve requirements.
Another factor contributing to the unpredictability of
the relationship between reserves and deposits
was that reserve requirements for Fed members
varied according to a bank’s deposit size and ac­
cording to the mix of deposits in individual insti­
tutions. If a bank had demand deposits of up to
$14 million, it had to keep 7 percent of these de­
posits in reserve. The more demand deposits it had,
the higher percentage it had to keep in reserve. If its
demand deposits totaled over $280 million, it had
to keep 1614 percent in reserve—this was the
highest reserve bracket. The reserve requirements
for savings and time deposits were similarly grad­
uated, with further differences based on maturities.
As deposits moved from bank to bank, or as they
shifted from one class or maturity of time deposits
to another, the amount of money that could be
supported by a given amount of required reserves
would also change. This was a further source of
uncertainty or slippage in the relationship between
Fed policy actions and the money supply.
These developments were particularly relevant in
view of the Fed’s recent decision to control money
growth by placing more emphasis on the growth of
reserves. That decision, which was made in October
1979 prior to the enactment of the new legislation,
was made primarily because the earlier procedures
for influencing the growth of money had proven
progressively less reliable even over reasonably
long periods of time. Money growth had to be ef­
fectively controlled; for while there is no universally
accepted view of the precise way in which the
money supply affects the economy, there is virtual
unanimity among policymakers and scholars that
restrained money growth is a necessary condition
for lower inflation, lower interest rates, and a healthy
overall economy.

However, under the new procedure, as under the
old procedure, monetary control was further com­
plicated by the fact that the information the Fed
received about the deposits of nonmember deposi­
tory institutions was based on a small sample of
such institutions. Further, much of the information
was received too infrequently—once a quarter—
and too late to be useful—sometimes after it was six
months out of date. Clearly, the Fed’s understand­
ing of developments relating to the growth of the
money supply was hindered by such insufficient
and belated data.
Early in 1980, the problems of declining member­
ship in the Federal Reserve System, uneven reserve
requirements, and inadequate information on
changes in the money supply were addressed by
the Depository Institutions Deregulation and
Monetary Control Act. The far-reaching changes
mandated by this act will be phased in gradually
over the next eight years. To rebuild the declining
portion of the nation’s deposits that were covered
by reserves, this law created universal reserve re­
quirements. Now all deposits that can be used for
transactions—checking accounts, NOW accounts,
share draft accounts at credit unions, and other
accounts — must be backed by reserves. Deposits
in commercial or nonpersonal savings accounts
must also be backed by reserves. Once the law is
phased in, it won’t matter if these accounts are held
by member institutions or not.
To create more even reserve requirements and to
make their impact more predictable, the new law
makes reserve requirements not only universal but
uniform. Financial institutions, regardless of their
total deposits, will be required to maintain the same
percentage of reserves. When the law is phased in,
institutions must maintain reserves of 3 percent for
transaction deposits that total $25 million or less
and must maintain reserves of 12 percent for the
portion of their total transaction deposits over
$25 million. Institutions must maintain reserves of
3 percent for commercial or nonpersonal savings
accounts, regardless of their total deposits.
To ensure that adequate and timely information is
available, the law requires all depository institutions
to report their deposit levels directly and promptly to
the Fed. From those institutions that weren’t directly
reporting to the Fed before, the Fed will receive the
information on a more timely basis. Institutions
holding the majority of the nation’s deposits will
report weekly, and the Fed will have useful infor­
mation on the deposits at nonmember institutions
in a matter of weeks instead of months as was the
case before. While attempts have been made to

Annual Report 1980

minimize this reporting burden, especially for small
institutions, the expanded information on the
money supply and credit will help in the implemen­
tation of monetary policy.
Over time, as more deposits are affected by reserve
requirements, as reserve requirements become
more uniform across depository institutions, and as
the data on which it bases its decisions about pol­
icy will have been improved, the linkage between
the level of reserves and the supply of money
should tend to become more serviceable for the
purposes of implementing Fed policy than other-

the nation’s financial system is not fixed. It will
respond to the new environment created by the law.
With the passage of the new law, new competitive
forces exist—and they will alter the investment
decisions of consumers and businesses, perhaps
creating new problems. For example, the huge in­
crease in the amount of financial resources flowing
into money market mutual funds that has been
observed since January 1981 could continue to
gain momentum. Lack of a reserve obligation
means returns on these funds can be set higher,
thus attracting resources away from financial in­
stitutions to investment vehicles not subject to

A t issue is not whether there w ill continue to be
public constraints on risk within the total financial
system, but whether there w ill be a t least an
increm ental shift aw ay from regulation o f individual
financial institutions in favor o f m arket-determ ined
investm ent decisions. That seems to be the promise
o f the new environment facing the financial system.
System wide safeguards and regulations w ill con­
tinue to lessen risk for the financial system in total[
while individual institutions have more discretion to
follow m arket-based signals for productive invest­
m ent As the transition to this n ew environment
proceeds, we m ust remain vigilant and alert so as to
ensure that new and perhaps even unforeseen
problems are managed in an efficient and prudent
m anner consistent with the overriding public in­
terest in a safe and sound banking system.

wise. However, that result will not be achieved until
the phase-in is largely completed. In the meantime,
necessarily complex formulas for the phasing down
of reserve requirements for current Fed members
and the phase-in of reserve requirements for non­
members, coupled with the inevitable problems
associated with new reporting requirements, will be
sources of new uncertainties and “noise” in the
relationship between reserves and money.
While the new law should ultimately enhance the
Fed’s ability to control the money supply as it is
currently defined, its longer-term impact on mone­
tary control is by no means certain. The structure of

Federal Reserve jurisdiction. In short, even before
the ink is dry on the new act, new complications are
presented to policymakers.
The transitional problems and the new challenges
should not, however, detract from the importance of
the new legislation to the Federal Reserve. Indeed,
its importance goes well beyond the manner in
which it arrested a potentially sharp deterioration in
the effectiveness with which monetary policy could
be implemented. That is, the enactment of the law
gave a clear signal — both here and abroad —as to
the importance we as a nation place on a strong
and independent central bank. In that regard, it is



Federal Reserve Bank
of Minneapolis

noteworthy that most national banking and thrift
industry trade groups supported these broadened
powers for the Fed, even though in many instances
their affiliated institutions would be, for the first time,
faced with the burden of reserve requirements. That
affirmation as to the need for a strong central bank
represents, we believe, a recognition that solutions
to our economic problems—while never easy—
would be considerably more difficult if market or
other forces altered the “independence within
government” that has been a hallmark of our central
bank for almost seven decades.
Economic Efficiency
Through Competition

In addition to arresting the potential deterioration in
the effectiveness of monetary control, the Deposi­
tory Institutions Deregulation and Monetary Control
Act of 1980 fosters increased efficiency in the
nation’s financial system. One important way it does
this is by reducing the regulatory and legal barriers
that prevented one type of institution from compet­
ing with another type. These barriers tended to in­
hibit the free flow of funds to their most productive
uses. Thus, by increasing the opportunities for
competition, powerful new forces will be working to
help us get the most out of our available financial
In the past, the barriers to competition that were
created by government regulations and laws were
formidable. Classes of financial institutions were
restricted to specific types of activities. Savings and
loan institutions could not compete with commer­
cial banks in the market for checking accounts.
Commercial banks couldn’t pay as much interest
on saving accounts as savings and loan institu­
tions. In addition, interest rate ceilings effectively
prevented institutions of the same class from com­
peting for deposits and loans.
The new banking law allows financial institutions to
compete more freely. It expands the lending
powers of thrift institutions in order to give them
more flexibility in managing their assets. It permits
all depository institutions to offer interest earning
checking-type accounts to households and certain
kinds of businesses. Finally, it phases out, over six
years, ceilings limiting the interest that may be paid
on time and savings deposits at all depository insti­
tutions.Thus, the nation’s 15,000 banks — large and
small —are in competition with 5,000 savings and
loan associations, 500 mutual savings banks, and

22,000 credit unions, all having increasingly similar
powers. A basic principle of economics is that
expanded competition will, in time, result in a more
efficient use of resources. For instance, as interest
ceilings are phased out, rates paid to savers will
more accurately reflect the value of the investment
uses to which those funds will be put. Thus, rates
paid to depositors will be better able to attract funds
and direct them to their most productive uses.
Because of the new competition, every depository
institution will soon be feeling the pressure to be
more efficient so that it can offer its customers
better service and lower prices than the institution
down the street.
Exactly how the financial system will evolve under
this fresh competition is difficult to foresee, but
some speculations are possible:
• The rates that financial institutions pay to deposi­
tors will probably go up. The pressure to pay
higher rates will exist because institutions can
now pay interest on checking accounts and
other accounts on which checks can be drawn
and because some interest rate ceilings are
being phased out. Such a development, it might
also be noted, is compatible with the need to
increase saving on a national basis.
• Operating margins at depository institutions may
narrow. As competition increases, the spread
between interest rates on deposits and interest
rates on loans—that is, the operating margin —
may be squeezed. This could reduce profitability
or alter the amount of capital needed in deposi­
tory institutions.
• The number of financial institutions may be re­
duced through merger, acquisition, or perhaps
even liquidation. In a more competitive market­
place, only the more efficient financial institutions
will prosper.
• If the number of financial institutions is reduced,
the Federal Reserve and other regulators will
have to consider modifying regulations and
practices that might impede the orderly consoli­
dation of institutions. Prohibitions against open­
ing branch offices— both within and across state
lines—will have to be reconsidered. Similarly,
prohibitions that prevent banks and thrift insti­
tutions from consolidating may have to be re­
• In the future, financial institutions could look
more alike than different. As banks, savings
banks, and savings and loan associations all
gain similar powers to choose their assets and
liabilities, they will be able to enter the same mar­
ket arena. Many of these inslitutions will continue

Annual Report 1980

to specialize by type, location, and size, but all
institutions will be better able to compete with
others within the markets they have chosen.
• The competition facing depository institutions
from money market funds, brokers, and large
merchandisers will remain intense. Such busi­
nesses, free of much of the regulation governing
depository institutions, have been innovative in
the past. They will no doubt continue to compete
for balances in the future.
Deregulation will mean that financial institutions
will, in some cases, be subject to new and different
forms of risk. Thrifts, for example, might face higher
risk than they used to, particularly during the period
when lending officers are acquiring expertise in
making types of loans other than mortgages. Simi­
larly, as some interest rate ceilings are phased out,
small and medium-sized institutions might face
higher risk as they acquire expertise in setting the
prices and the maturities of their time and saving
But if there is higher risk, there is also more oppor­
tunity for competitive forces to direct financial
resources to the most productive uses. So the new
environment brings into clearer focus the trade-off
between the benefits of market-directed investment
and the costs of added risk for the financial system.
This trade-off has always existed, and society has
rightly designed safeguards to control and limit
risks in the financial system. Because we as a na­
tion have agreed that market discipline alone can’t
be the sole guide for financial system functions, the
financial system has been, and will continue to be,
guided in part by publicly imposed safeguards
such as supervisory examinations, Federal Reserve
discount lending, and deposit insurance.
At issue, however, is not whether there will continue
to be public constraints on risk within the total
financial system, but whether there will be at least
an incremental shift away from regulation of in­
dividual financial institutions in favor of marketdetermined investment decisions. That seems to be
the promise of the new environment facing the
financial system. Systemwide safeguards and regu­
lations will continue to control and limit risk for the
financial system in total, while individual institutions
have more discretion to follow market-based sig­
nals for productive investment. As the transition to
this new environment proceeds, we must remain
vigilant and alert so as to ensure that new and
perhaps even unforeseen problems are managed
in an efficient and prudent manner consistent with
the overriding public interest in a safe and sound
banking system.

Economic Efficiency
Through M arket Pricing

The new legislation will move in the direction of
promoting efficiency, not only by encouraging
competition among private financial institutions,
but by compelling the Federal Reserve to set prices
for its services in much the same way as any other
business. For the first time, the services of an
agency in the public sector will be priced and
offered in competition with those of private firms.
Fees will be charged for check clearing and collec­
tion, wire transfer of funds and securities, automated
clearinghouse activities (electronic payments),
settlements of financial institutions’ debits and
credits, the safekeeping of securities, and the
transportation and insurance of currency and coin.
Because of these fundamental changes, the alloca­
tion of resources between the public and private
sectors will ultimately be governed more by market
forces. These two sectors will — based on relative
efficiency—allocate the available resources
This new allocation of resources is probable be­
cause the incentives now facing depository insti­
tutions are quite different than the ones that used to
face them. Under former laws, when the Federal
Reserve offered its services at no explicit charge,
member banks benefited themselves and their
customers the most by using the Fed’s services
even when the services’ value fell below the value of
the resources that were used in providing them —
below the real costs imposed upon the Fed and the
nation. This sometimes meant that member banks
used the Fed’s services even when competing
services that used less labor, better technology, or
fewer physical resources were available.
Now depository institutions have more incentives to
choose the most efficient provider of services.
Since most Federal Reserve services will be offered
to all depository institutions at explicit prices, these
institutions may choose whether to obtain such
services from the Fed or from a private correspon­
dent bank. Previously, a nonmember depository
institution did not—for all practical purposes—
have this choice, since it was not able to receive
services directly from the Fed. Thus, under the new
arrangements, all institutions will have the incentive
to use the service that imposes the least real cost
on society because this service will have the lowest
Consistent with its congressional mandate to pro­
mote efficiency, the Federal Reserve will set its



Federal Reserve Bank
of Minneapolis

prices so that a truly competitive framework for the
delivery of financial services is established. The
general pricing guidelines provided in the new
legislation plus the more detailed guidelines estab­
lished by the Board of Governors of the Federal
Reserve System require the Fed to determine its
prices in the same fashion as a private, competing
firm. Its prices must fully cover its costs, including
overhead. To avoid unfairly undercutting its com­
petitors’ prices, the Fed must even set its prices to
cover taxes, profit, and other costs of doing busi­
ness like a private firm— although it pays no federal
taxes and does not try to earn a profit.

plated by the drafters of the legislation requires,
among other things, that institutions will make
rational choices among alternative suppliers of like
services. Thus, one of the Fed’s major responsibili­
ties in this environment will be to ensure that all
depository institutions have a good understanding
of the nature of Fed services, their prices, and the
operating rules under which they will be available.
In order to promote that understanding, we at the
Federal Reserve Bank of Minneapolis have estab­
lished an advisory council comprised of a cross
section of bankers, officials of savings institutions

The Federal Reserve has contributed and can con­
tinue to contribute to achieving the goal o f an
efficient payments system. The Fed w ill be a source
o f constructive competition, both as an active and as
a potential participant in the m arket even if we, o f
necessity, define our role in som ewhat different
terms than would a wholly private entity. In short,
while the trappings m ay differ, we in the Federal
Reserve are fully com m itted to the efficiency goal,
and we have every intention o f moving forward in a
manner consistent with that objective.

The shift from the old system of providing services
only to members at no explicit charge to the new
system of providing services to all depository insti­
tutions at an explicit price entails some major chal­
lenges for the Fed. It must formulate rules for billing
its customers, establish new accounting systems,
and decide the size of the balances it will require for
those who use its services. Once it has laid this
detailed groundwork, it must effectively communi­
cate it to its potential customers. Every depository
institution, large or small, bank or thrift, must have
this information in order to select the best alter­
native for obtaining needed services. Achieving the
market discipline and the efficiencies contem

and credit unions, and representatives of trade
associations and bank regulatory agencies to assist
us in better anticipating the needs of all depository
institutions in the context of the various require­
ments of the Monetary Control Act.
It is difficult, at this early date, to foresee how events
will unfold in this new environment of priced Fed
services. Change will certainly occur— perhaps
even major change— but it seems that the process
will be gradual. Market pricing and service compe­
tition will yield substantial rewards for innovation,
good management, and technological advance by
competing service providers, including the Fed. For

Annual Report 1980

wholesale-level customers, including banks and
other depository institutions, there will be the im­
portant flexibility to match their service needs with
market options.
In this setting, Federal Reserve people look forward
to pricing, competition, and resolution of the public
service obligation issues. There is promise of a new
era where market forces will challenge and per­
haps change long-standing systems that, however
worthy, have nonetheless been shielded from the
rigorous testing of the marketplace. Now the sys­
tem is opened—with risks for all players — but also
with promise of efficient allocation of resources,
which is the pervasive order of the day. Moreover, in
those instances where it is deemed necessary to
publicly support the financial system to guarantee
minimum service, the public costs will be visible.
The bottom line of this process is clear. We must
recover our costs and act in a fashion that is con­
sistent with the goal of promoting efficiency in the
payments mechanism. The Federal Reserve has
contributed and can continue to contribute to
achieving the goal of an efficient payments system.
The Fed will be a source of constructive compe­
tition, both as an active and as a potential partici­
pant in the market, even if we, of necessity, define
our role in somewhat different terms than would a
wholly private entity. In short, while the trappings
may differ, we in the Federal Reserve are fully
committed to the efficiency goal, and we have every
intention of moving forward in a manner consistent
with that objective.
M eeting the N ew Challenges

The Federal Reserve will, in the 1980s, face new
and difficult challenges as the financial system —
and the economy more generally—respond to the
new forces for change unleashed by the Monetary
Control Act. These forces carry with them great
promise that our financial system will become even
more dynamic, more competitive, and more ef­
ficient. But those same forces also bring with them
the potential for greater risk and greater uncertain­
ties. Indeed, even the most clairvoyant among us
can, at best, foresee only the fuzzy outlines of how
events will unfold. Those uncertainties and that
inherently fuzzy view of the future must temper our
attitudes and our actions as we navigate through
previously uncharted waters. Indeed, the drafters of
the legislation —sensitive to the need to balance
caution with deliberate speed — built into the legisla­
tion phasing provisions and elements of regulatory

flexibility with a view toward ensuring that the evolu­
tion proceeds in an orderly fashion.
While there are many areas of uncertainty associ­
ated with this evolution to the new era, one thing is
very clear. That evolution will proceed far more
smoothly and effectively in an environment of re­
duced inflation. For example, if inflation were
reduced, interest rates would almost certainly be
lower and Regulation Q, which sets interest rate
ceilings, could be eliminated much more easily—
with fewer economic dislocations and with fewer
problems for those affected by this regulation. If
interest rates were running below the ceilings es­
tablished in Regulation Q, few would care whether it
was gradually abolished or not, and its elimination
would have virtually no impact on the financial sys­
tem. The inevitable conclusion is that economic
efficiency cannot be pursued in a vacuum; it must
be pursued along with price stability.



Federal Reserve Bank
of Minneapolis

1980 Operating Highlights

Planning and implementing an effective response
to current and future service demands of the Upper
Midwest financial community is the challenge of
the 1980s for the Federal Reserve Bank of Minne­
apolis and its Helena branch. That process began
in earnest during 1980 with the installation of ser­
vice capacity improvements at the Minneapolis
office. Changes were needed to assure continued
high-quality Fed service in response to expanded
business volume in recent years. In addition,
management and staff began intensive planning
efforts to prepare the Minneapolis and Helena
offices for legislatively mandated new service func­
tions and possible requests from the financial
community for additional service volume in the
Provisions of the Depository Institutions Deregu­
lation and Monetary Control Act of 1980 greatly
expanded business contacts between Ninth District
financial institutions and the Minneapolis Fed.
Some new business relationships—such as de­
posit reporting and reserve maintenance—are
mandated. In addition, Federal Reserve payment
services will become available to all financial insti­
tutions in the district according to a specified time­
table. Services to be affected include wire and
securities transfer, check clearing, coin and cur­
rency supplies and transportation, safekeeping of
securities, and net settlement services. All deposi­
tory institutions in the district—some 2,400—will
have access to Federal Reserve services. Previously
the bulk of Fed services were directly available only
to the 515 member banks in the district. It is not
known how many nonbank financial institutions or
nonmember banks will utilize Fed services more
intensely, but managers of Fed service departments
must analyze and weigh potential changes in ser­
vice volume and adequately prepare.
Quite apart from the need to prepare for possible
service demands from new customers, recent pat­
terns of expanded use have in themselves required
a comprehensive update of service capabilities at
the Minneapolis Bank. For instance, the volume of
checks processed has increased an average of
8 percent per year since 1974, or a cumulative in­
crease of about 50 percent in that period. By yearend 1980, the M inneapolis office was processing
about 3.2 million checks a day, which placed it as
the second largest check handling office in the
entire Federal Reserve System. This growth has
brought pressure for expansion and, more impor­
tantly, modernization of operating capacity to realize
the gains in productivity associated with fast-moving
technological changes. New reader/sorters and
computers are being installed to increase peak

load processing capacity by 70 percent, and the
check processing system has been segregated
into two distinct operating units. Thus, if equipment
failure plagues one of the units, the other can con­
tinue to effectively serve customers. The new sys­
tem also provides greater flexibility in workflow
management during periods of heavy volume.
The result of this investment will be more effective
and efficient service. The process of converting to
new check processing equipment amid a climate
of continued rapid growth in volume has proven
difficult and was accompanied by some significant
operating problems. These problems appear to be
coming under control, and during 1981 we expect
to regain the timely and high-quality check opera­
tion that has characterized the Minneapolis Fed for
many years.
Major improvements in the Bank’s general data
processing hardware and software were made in
1980 in response to ongoing increases in work
volume and the added workload associated with
provisions of the Monetary Control Act. Changes
also were part of the Federal Reserve System’s
long-range automation program calling for stan­
dardization of data processing at Reserve Banks in
order to facilitate future resource sharing among
In October 1980, a high-speed currency processor
was installed at the Minneapolis office. This equip­
ment permits automated, high-speed processing of
50,000 notes per hour, determines individual note
fitness, checks for counterfeits, and destroys unfit
currency automatically and securely. The equip­
ment will permit improvement in the quality of the
currency stock circulating in the district without
inordinate cost increases.
Another notable operational improvement in 1980
was the effort to develop a new Federal Reserve
communications network for the transfer funds and
securities between financial institutions throughout
the country. The new communications system will
employ the most advanced technology, replacing
the current network by the end of 1981. It will
combine the flexibility and increased capacity
necessary to meet the expanding requirements of
the financial community through the 1980s. More­
over, safety enhancements built into the new sys­
tem minimize the risks of service disruption.
Bank operating costs increased nearly 20 percent
in 1980, as the accompanying charts indicate. This
reflects a sharp departure from the five-year trend of
expense growth averaging about 5 percent per
year. The sharp acceleration in expenses during

Annual Report 1980

1980 was, in part, associated with a series of “one
time” programs and initiatives. Included among
these were: (1) the conversion and expansion of
check processing facilities and the associated
efforts to reduce levels of float; (2) the conversion
and upgrading of the Bank’s general data process­
ing computer facilities; and (3) the initial costs
associated with the implementation of the Mone­
tary Control Act. Once the major thrust of these
initiatives is behind us—which should occur in
mid-1981 —the Bank fully expects that the rate
of growth in its expenditures will fall back to ap­
proximate more closely that experienced from 1975
to 1979.

Bank management is confident that these opera­
tional changes represent important investments in
the ability of the Federal Reserve Bank of Minne­
apolis and the Helena branch to accommodate
current demand for Fed services and future growth
in demand, if that should materialize. At the same
time, the quality of service will be maintained or
improved. Thus, planning efforts and new invest­
ments will bring improved operating efficiency to
Federal Reserve services offered to financial insti­
tutions of the Upper Midwest.

Total Expense

Total Output

Unit Costs

1974 = 100



Labor Productivity




Federal Reserve Bank
of Minneapolis

Statement of Condition

(In Thousands)

December 31, December 31,

Gold Certificate Account.....................................
Interdistrict Settlement Fund..............................
Special Drawing Rights Certificate Account ...
C oin.......................................................................
Loans to Depository Institutions.........................
Federal Agency Obligations.....................
U.S. Government Securities.......................
Total Securities............................................
Cash Items in Process of Collection..................
Premises and Equipm entLess: Depreciation of $10,988 and $9,538 ...
Other Assets.........................................................
Total Assets..................................................
Federal Reserve Notes.......................................
Depository Institutions................................
U.S. Treasury—General Account..............
Other Deposits............................................
Total Deposits..............................................
Deferred Availability Cash Item s.......................
Other Liabilities...................................................
Total Liabilities............................................
Capital Accounts
Capital Paid In .....................................................
Total Capital Accounts................................
Total Liabilities and Capital Accounts

$ 225,000

$ 231,534

$ 670,543

$ 881,419

$ 38,074
$ 76,148

$ 36,256
$ 72,512

Annual Report 1980

Earnings and Expenses

(In Thousands)

For the Year Ended December 31

Current Earnings
Interest on Loans to Member B anks................
Interest on U.S. Government Securities
and Federal Agency Obligations.....................
All Other Earnings................................................
Total Current Earnings................................
Current Expenses
Salaries and Other Benefits................................
Postage and Expressage...................................
Telephone and Telegraph..................................
Printing and Supplies.........................................
Real Estate Taxes................................................
Furniture and Operating Equipment—
Rentals, Depreciation, Maintenance..............
Depreciation— Bank Premises...........................
U tilities..................................................................
Other Operating Expenses..................................
Federal Reserve Currency..................................
Total Current Expenses..............................
Less Expenses Reimbursed or Recovered ....
Net Expenses..............................................
Current Net Earnings.........................................
Net Deductions...................................................
Assessment for Expenses of
Board of Governors..................................
Dividends Paid............................................
Payments to U.S. Treasury.........................
Transferred to Surplus................................
Surplus Account
Surplus, January 1 ..............................................
Transferred to Surplus—as above.....................
Surplus, December 31.........................................



$ 5,049

$ 6,356

$ 20,893
$ 35,541
$ 33,173

$ 17,516
$ 29,706
$ 27,297

$ 1,818

$ 2,216

$ 36,256
$ 38,074

$ 34,040
$ 36,256


Volume of Operations

(Minneapolis and Helena Combined)

For the Year Ended December 31
Loans to Member Banks.................
Currency Received and Verified___
Coin Received and Counted..........
Checks Handled, Total.....................
Collection Items Handled...............
Issues, Redemptions, Exchanges
of U.S. Government Securities___
Securities Held in Safekeeping.......
Transfer of Funds.............................

159 million
383 million
832 million
.4 million
10.2 million

157 million
352 million
770 million
.3 million
9.8 million

Dollar Amount
$ 3.3 billion $ 2.4 billion
1.5 billion
1.4 billion
66 million
65 million
298 billion
281 billion
.7 billion
.5 billion
83.6 billion
99.4 billion
2.7 billion
3.1 billion
1.569 trillion 1.1 69 trillion

Federal Reserve Bank
of Minneapolis

Annual Report 1980

Directors of the Federal Reserve Bank of Minneapolis

Terms expire December 31 of indicated year

January 1,1981

Stephen F. Keating
Chairman and Federal Reserve Agent

William G. Phillips
Deputy Chairman

Class A
Elected by Member Banks

Class B
Elected by Member Banks

Class C
Appointed by Board of Governors

Zane G. Murfitt(1 981)
Flint Creek Valley Bank
Philipsburg, Montana
Henry N. Ness(1 982)
Senior Vice President
Fargo National Bank
and Trust Company
Fargo, North Dakota
Vern A. Marquardt(1 983)
Commercial National Bank
L’Anse, Michigan

Russell G. Cleary (1981)
Chairman and President
G. Heileman Brewing Company, Inc.
LaCrosse, Wisconsin
Joe F. Kirby (1982)
Western Surety Company
Sioux Falls, South Dakota
Harold F. Zigmund (1983)
Blandin Paper Company
Grand Rapids, Minnesota

William G. Phillips (1 981)
International Multifoods
Minneapolis, Minnesota
Sister Generose Gervais (1 982)
Saint Marys Hospital
Rochester, Minnesota
Stephen F. Keating (1 983)
Retired Chairman
Honeywell Inc.
Minneapolis, Minnesota

Directors of the Helena Branch

Norris E. Hanford

Ernest B. Corrick
Vice Chairman

Appointed by Board of Directors
Federal Reserve Bank
of Minneapolis

Appointed by Board of Governors

Lynn D. Grobel(1981)
First National Bank
Glasgow, Montana
Harry W. Newlon (1982)
First National Bank
Bozeman, Montana
Jase O. Norsworthy (1982)
The N R G Company
Billings, Montana

Norris E. Hanford (1981)
Wheat and Barley Operator
Fort Benton, Montana
Ernest B. Corrick (1982)
Vice President and General Manager
Champion International Corporation
Timberlands-Rocky Mountain
Milltown, Montana

Member of Federal Advisory Council

Clarence G. Frame
Vice Chairman
First Bank System, Inc.
Minneapolis, Minnesota



Federal Reserve Bank
of Minneapolis

Annual Report 1980

Officers of the Federal Reserve Bank of Minneapolis

January 1, 1981

E. Gerald Corrigan
Thomas E. Gainor
First Vice President
Senior Vice Presidents

Vice Presidents

Assistant Vice Presidents

Melvin L. Burstein
Senior Vice President
and General Counsel
John P. Danforth
Senior Vice President
and Director of Research
Leonard W. Fernelius
Senior Vice President
John A. MacDonald
Senior Vice President

Sheldon L. Azine
Vice President
and Deputy General
Lester G. Gable
Vice President
Phil C. Gerber
Vice President
Gary P. Hanson
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
Arthur J. Rolnick
Vice President
and Deputy Director
of Research
James R. Taylor
Vice President
Robert W. Worcester
Vice President

Robert C. Brandt
Assistant Vice President
James U. Brooks
Assistant Vice President
Marilyn L. Brown
Assistant Vice President
Richard K. Einan
Assistant Vice President
and Assistant Secretary
Richard C. Heiber
Assistant Vice President
William B. Holm
Assistant Vice President
Ronald 0. Hostad
Assistant Vice President
Ray L. Hulett
Assistant Vice President
Ronald E. Kaatz
Assistant Vice President
Gerald J. Mallen
Assistant Vice President
Preston J. Miller
Assistant Vice President

Officers of the Helena Branch

Betty J. Lindstrom
Vice President

G. Randall Fraser
Assistant Vice President
Robert F. McNellis
Assistant Vice President

James L. Narragon
Assistant General Auditor
Ruth A. Reister
Assistant Vice President
and Secretary
Charles L. Shromoff
Assistant Vice President
Colleen K. Strand
Assistant Vice President
Theodore E. Umhoefer
Assistant Vice President
Joseph R. Vogel
Chief Examiner
Norma J. Wuertz
Assistant Vice President