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Federal Reserve Bank
of Minneapolis
Annual Report 1983

Economic Prosperity:
An Eclectic View
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Federal Reserve Bank
of Minneapolis
Annual Report 1983

Economic Prosperity:
An Eclectic View

President’s Message
The 1983Annual Report of the Federal Reserve Bank of Minneapolis,
in line with the practice of the past several years, is largely devoted to an
essay on a broad aspect of economic and financial policy. This year’s essay,
“Economic Prosperity: An Eclectic View,” seeks to examine in some detail
economic developments over the past fifteen years in an effort to shed
some light on why economic performance over that period seemed to fall
short of earlier experience and expectations. The essay suggests that such
a review can help to clarify a vision of the future in which the mistakes of
the past are avoided and our prospects for sustained economic prosperity
accordingly enhanced. In a more immediate sense, the backdrop of the
essay is the stellar performance of the economy in 1983 and early 1984 and
the all-important question of whether these recent gains can be extended
well into the future. Building on the experience of the past, the essay
suggests that there are steps which can be taken that can distinctly
improve the odds that the solid economic performance of 1983 can be
extended out over the decade of the 1980s.
While the essay reflects my own views and impressions, I am indebted
to my associates Bob Litterman, Preston Miller. Gary Stern, and Dick Todd
for their valuable and perceptive suggestions on various drafts of the essay.

President




Economic Prosperity:
An Eclectic View
Eclectic: selecting what appears to be best or true in various
and diverse doctrines or methods: rejecting a single, unitary,
and exclusive interpretation, doctrine, or m
ethod.
Webster^ Third New International Dictionary, unabridged

The year 1983 was an exceptionally good year for the national economy.
Indeed, the happy combination of rapidly rising real output, modest inflation,
gains in real incomes, and growth in productivity, profits, and stock prices took
on a special glow in the aftermath of the worst recession in the postwar period
and in the wake of roughly fifteen years of economic performance which simply
did not seem to measure up to earlier experience or expectations.
Despite the progress made in 1983, a number of highly visible problems
persisted throughout the year and remain very much with us as we move into
1984. The unemployment rate remains historically high despite its impressive
drop over the year 1983. The debt problems of the less-developed countries—
with all of their implications for worldwide growth and stability as well as for our
export industries— remain very real despite the important progress made in
1983 in containing and correcting these problems. Substantial and unsustainable
capital inflows from abroad are, in effect, financing a sizable fraction of our
federal budget deficit. Basic industries in the United States and elsewhere—
ranging from agriculture to steelmaking— continue to struggle under the
weight of complex secular and cyclical forces that have impaired profitability and
growth. And, perhaps most ominously, looking out over the balance of the decade
we are confronted with prospective federal deficits of unprecedented magni­
tudes. Indeed, unless actions are taken to reduce spending or increase taxes—
or both— these massive structural deficits will persist even if the decade is
characterized by steady growth and modest inflation rates.
Against the backdrop of these problems, the stellar performance of the
economy in 1983 raises a profound question. Namely, are the events of 1983 a sign
that we are on the road to sustained, noninflationary economic growth that will
provide the opportunity and the means to resolve these problems, or was the
noninflationary growth of 1983 a flash in the pan which cannot be or will not be
extended— not just into 1984, but over the decade of the 1980s? Looked at in the
context of the 1970s, that question is not altogether academic. For example, one
can point to years such as 1972 and 1976 and find striking parallels between the
kind of economic performance in those years and that in 1983. Yet in those earlier
periods, the gains of a year or two were eroded by renewed and successively
sharper outbreaks of inflation— a process which carried with it the seeds of the
sharp and painful recession of the early 1980s.
Looked at in the light of that earlier experience, we are now at a crucial
crossroad in our quest for true economic prosperity. Indeed, history tells us that
in the first year or so of a recovery, such as in 1983. progress comes quite easily.
Slack conditions in labor and product markets virtually assure that rising levels
of output can be accommodated with little or no upward pressure on wages and
prices; sharp productivity gains come almost automatically with all of their




Looked at in the light of that
earlier experience, we are now
at a crucial crossroad in our
quest for true economic pros­
perity.

3

... as the recovery matures,
the task of maintaining behav­
ior compatible with lasting
prosperity becomes more diffi­
cult.

... we, in effect, decided we
could live with a little more
inflation.

4



implications for corporate profits, cash flows, and the capacity of businesses to
satisfy their financing needs internally; and, more generally, proximity to the
reality of recession breeds an intense form of discipline in economic and
financial decision making.
However, history also tells us that, as the recovery matures, the task of
maintaining behavior compatible with lasting prosperity becomes more difficult.
Markets become more receptive to higher wages and prices; large productivity
gains are no longer automatic; credit market congestion grows; and individuals
and institutions become more aggressive in their efforts to sustain, if not expand,
gains in income and income shares. Quite clearly, we are now at or rapidly
approaching the point in the cyclical upswing in economic activity at which we
will be put to the test— the test of whether we can avoid the backsliding that
followed the short-lived periods of noninflationary growth of the early and m
id1970s.
The purpose of this essay, therefore, is to review the developments of the
past fifteen years or so from the perspective of economic policy and perceptions
about the priorities for economic policy. Such a review' can help to clarify a vision
for the future in which the mistakes of the past can be avoided and our prospects
for sustained noninflationary growth accordingly enhanced. By its very nature,
the essay reflects subjective impressions concerning attitudes about economic
policy and economic priorities of both policymakers and the public at large.
However imperfect those insights may be, it does seem that the broad sweep of
events over the past fifteen years points to a pattern of events and policies which
help to explain the subpar economic performance of that period and can also
shed light on the necessary ingredients for future prosperity.
The picture of the past fifteen years that emerges is one that has several
key elements: first, throughout most of the period, we tended to accept and act
on the basis of a view which suggested that economic priorities and policies
entailed rather clear and sustainable tradeoffs, as for example, between inflation
and unemployment or between tight monetary policy and easy fiscal policy.
Second, having accepted that view, we, in effect, decided we could live with a
little more inflation. But when that “little more” inflation turned out to be a lot
more inflation, we found ourselves in a position in which monetary policy— if not
a monetarist policy— was increasingly looked to as a kind of a panacea which
would solve our economic problems. Third, the heavy burden placed on monetary
policy was made all the more difficult by the weight of a fiscal policy that had
developed— over a long period of time— a strong bias toward less discretion,
larger deficits, and more inflation. As a related matter, we found that the realities
of increased worldwide economic and financial interdependence had produced a
situation— floating exchange rates notwithstanding— in which the external
trade and financial conditions in the United States and elsewhere posed real
constraints for monetary policy. Finally, at various intervals along the way, we
flirted with, if not embraced, particular economic theories which were thought by
r
some to provide the missing link that would insure prosperity. Indeed, whether it
was the Keynesians, the monetarists, the supply-siders, or those calling for a
return to a gold standard, there were recurring themes suggesting that the key
which would open the door to an economic Shangri-la was contained in some
prescription or rule.
These elements of economic behavior and thought interacted with each
other such that even in retrospect it is difficult to identify causes and effects.
However, a good place to start is with the widespread perception in much of the

period that a sustainable tradeoff existed between inflation and unemployment.
This idea is important not only because it focuses on the two economic variables
which, at any point in time, seem to best capture the state of our economic well­
being, but also because'the perception about such a tradeoff can go a long way in
helping to explain the shifting focus of economic policy and attitudes about
economic priorities over much of this period.

Tradeoffs and Shifting Priorities
Throughout the postwar period, there has been a strong national
commitment to high or full employment in the United States. That commitment,
as reflected in both law and folklore, has typically been accompanied by a parallel
commitment to price stability. However, in practice, those dual national prior­
ities have not been treated symmetrically in that greater weight has tended to be
given to the goal of high or full employment. That heavier emphasis on high or full
employment was a natural outgrowth of the depression of the 1930s and the fact
that, throughout the first two decades of the postwar period, inflation was not a
serious problem in the United States. Thus, it was only when inflationary
pressures began to build over successive business cycles in the 1970s that the
objective of price stability began to collide in a meaningful way with the objective
of high or full employment. Even then, it was a fairly easy matter to tolerate more
inflation in the hope— if not the expectation— that by accepting more inflation
we would satisfy the goal of high or full employment at little cost. In part, this was
true because the costs of unemployment are so immediate and visible while the
costs of inflation are very hard to measure and emerge only over time.
In the mid-1960s, it was an easy task to look back at an inflation/
unemployment relationship for the preceding fifteen years (see figure 1) which
suggested economic choices which were attractive, if not outright seductive. For
example, a move along the Phillips curve from an unemployment rate of 6
percent to one of about 4 percent could be bought by a rise in the inflation rate to
about 3 or 4 percent— a tradeoff that seemed quite acceptable from both a social
and an economic point of view. To some degree, the perception of an acceptable
tradeoff between inflation and unemployment contributed to the apparent broad
public consensus that emerged in the late 1960s to the effect that a “little more”
inflation was not a bad thing— particularly since it was perceived that the
inflation rate would plateau at a modestly higher rate. Indeed, even today, one
does not have to look very hard to find informed opinion suggesting that the
inflation rate should be permitted to rise a couple of percentage points in order to
somehow guarantee that the expansion will continue at a rapid clip.
As the events of the past fifteen years unfolded, the Phillips curve for this
period looked nothing like that which might have been expected from the
experience of the earlier postwar period. In fact, for the latter period, the
relationship (see figure 1) looks almost random except for the general tendency
of higher rates of unemployment to be associated with higher rates of inflation.
While a number of factors, including demographics and energy shocks,
contributed to the problems of the 1970s, one key factor is the destabilizing
manner in which the inflationary process fed on itself once it had a toehold on




.. .the costs of unemployment
are so immediate and visible
while the costs of inflation are
very hard to measure and
emerge only over time.

. . .the Phillips curve for this
period looked nothing like that
which might have been ex­
pected from the experience
of the earlier postwar period.

5

Figure 1 Unemployment and Inflation 1
950-1983

1950-1965

1965-1983

B

B

n

■—

>•

■■

MB

HI M il

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

naiHaBI

.
M
*

;
Unemployment Rate

9

10

11%

Unemployment Rate

1 US
0

Sources: Department of Commerce, Bureau of Economic Analysis, and Department of Labor,
Bureau of Labor Statistics

The patterns of financial mar­
ket behavior that emerged in
the 1970s also illustrate the
insidious manner in which
inflation undermined our pros­
pects for prosperity and—
unfortunately, but inevita­
bly— insured that the cost of
reversing that inflationary pro­
cess would be so very high.

6




expectations and on institutional behavior. For example, the indexing of wage
agreements, pensions, and even interest rates— practices which were designed
in part to make inflation easier to live with— seemed in the end to exacerbate
rather than ameliorate the problem. Indexing built more costs and cost rigidities
into the system, but, more importantly, it contributed to the illusion that
individuals and institutions could be protected from inflation. In retrospect,
however, it is clear that the protections afforded were quite imperfect, particu­
larly when it is recognized that these mechanical practices tended to become
substitutes for the traditional disciplines and decision making associated with
the workings of a market economy. Moreover, the process of accelerating
inflation also masked changes in relative prices and in that way also undermined
the effective functioning of a market economy.
The patterns of financial market behavior that emerged in the 1970s also
illustrate the insidious manner in which inflation undermined our prospects for
prosperity and— unfortunately, but inevitably— insured that the cost of
reversing that inflationary process would be so very high. For example, during
much of the 1970s, real interest rates— and particularly real after-tax interest
rates— were low or negative. A climate— even a transitional climate— of very
low or negative real interest rates creates powerful incentives to consume rather
than save and to borrow rather than invest. Resulting patterns of behavior—
even at the margin— tend to add demand pressures to the economy, but over
time they have the even more damaging effect of reducing savings flows, stifling
investment, and inhibiting the capital formation necessary to sustain produc­
tivity growth. The experience of the late 1970s and at the turn of the decade also
suggests that some borrowers— and their intermediaries— made the perhaps
irrational bet that real interest rates would never move to sharply higher levels
and that inflation would continue to paper over the burdens of heavy debt.
Eventually, of course, interest rates moved up to reflect the double-digit inflation
at the turn of the decade.

The legacies of that adjustment to the reality of inflation are still with us
today. Certainly, inflationary expectations— while somewhat stifled at the
moment— remain a powerful overhang on investor attitudes and thus
contribute to the still high level of interest rates. And for many, the debt burdens
contracted in that earlier period remain largely in place while the real costs of
servicing that debt have risen steeply, thus posing a threat to the economic well­
being of debtor and creditor alike.
The message which emerges from the experience of the 1970s is that a
seemingly benign “little more” inflation was, in fact, quite malignant. In the long
run, there was no such thing as a little more inflation. Once inflation accelerated
over successive business cycles and once inflationary expectations became
pervasive, the process of inflation proved to be simply and fundamentally incom­
patible with patterns of behavior that can produce and sustain low levels of
unemployment. In this most basic sense, the once conventional wisdom about a
sustainable tradeoff between inflation and unemployment was not only
misleading but wrong. The nice, neat, and seemingly attractive two-dimensional
tradeoff between inflation and unemployment had a fatally missing dimension—
the insidious and destabilizing way in which inflation and inflationary expecta­
tions feed on themselves once unleashed.
The broad implications of the events of the 1970s and the early 1980s seem
clear enough. First and foremost, they suggest that the goal of price stability
cannot take a back seat to the goal of high or full employment. To be sure, there
will always be cyclical ups and downs in both the inflation rate and the
unemployment rate. However, experience suggests that prospects for
maintaining relatively low levels of unemployment will be reasonably secure only
if cyclical swings in the inflation rate are not permitted to cumulate as they did in
the 1970s. That challenge is very difficult because, even in the 1970s, cyclical
lows in the inflation rate of 3or 4 percent compared to the cyclical highs in the
unemployment rate made it seem urgent to pursue expansionary policies well
into the mature phase of the upside of the business cycle. Indeed, when
unemployment rates are still relatively high and inflation rates relatively low, it is
very hard to accept the proposition that more moderate growth in the short run
may, in the fullness of time, be better than more rapid growth. This is even harder
to accept in a setting in which the effects of stimulative policies on the inflation
rate tend to lag behind their effects on real output and employment. However,
the painful experience of the 1970s should serve as a vivid reminder that the
need for discipline in economic policy may be greatest when conditions on the
surface are most likely to cause us to drop our guard.

Money and Monetary Policy
Throughout much of the early postwar period, monetary policy— for that
matter, the Federal Reserve as an institution— was of only passing concern to
large segments of the public and even to relat ively large segments of the business
community. Within government, concern with the Fed and with Fed policy was
naturally somewhat greater, but even within government there was not a
continuing and pervasive burning interest in the day-to-day affairs of the central
bank.




The message which emerges
from the experience of the
1970s is that a seemingly
benign “little more” inflation
was, in fact, quite malignant.

... the goal of price stability
cannot take a back seat to the
goal of high or full employ­
ment.

Such a strict monetary rule
was seen as insuring better
results in economic perform­
ance, reducing or eliminating
market uncertainty, and pro­
viding the Congress and others
with an unambiguous handle
with which to evaluate mone­
tary policy.

8




The events of the 1970s were to change all that in a number of ways. For
example, as the inflationary problems of the 1970s mounted, in a context in
which there was an almost instinctive recognition that inflation is primarily a
monetary phenomenon, economists, legislators, journalists, and others increas­
ingly and naturally looked to monetary policy for solutions. This natural and
appropriate tendency was institutionalized with the passage, in 1978, of the
Humphrey-Haw'kins Act. That legislation required the Federal Reserve to report
to the Congress twice a year on its prospective targets for monetary growth.
However, even as interest in and concern about money and monetary policy
mounted over the 1970s, economic performance seemed to slip further. By the
turn of the decade, high and rising unemployment and double-digit inflation
rates were sapping the underlying strength and vitality of the economy.
Out of all of this developed a broad consensus that inflation was this
nation’ number one economic problem. In those circumstances, the natural
s
tendency to look for a monetary solution to a monetary problem gave rise to an
increasing call for a monetarist solution in which monetary policy would be
reduced to a simple rule in which the central bank conducts policy with the sole
objective of achieving some stable growth rate in “money.” Such a strict monetary
rule was seen as insuring better results in economic performance, reducing or
eliminating market uncertainty, and providing the Congress and others with an
unambiguous handle with which to evaluate monetary policy. Of course, such
strict monetary rules have considerable intuitive appeal since they have their
origins in the wholly valid proposition that a basic discipline in the money and
credit creation process is a prerequisite to price stability and stability more
generally.
While the validity of that general linkage between money and inflation is
widely accepted, the use of strict rules for the conduct of monetary policy has not
been widely embraced either inside or outside the Federal Reserve. Moreover,
the experience of the past few years tends to suggest that rigid adherence to a
monetary rule would have been quite inappropriate. A monetary rule presup­
poses that (1) money can be defined and measured with a reasonable degree of
accuracy; (2) the interest payment characteristics of money remain fairly stable
over time; (3) the costs of reducing variability in money growth in the short run
are fairly small; and (4) the relationship between money growth and income—
that is, velocity— is fairly stable. While there have always been differences of
opinion as to the validity of these propositions, the events of the past two years or
so would seem to lend powerful weight to the case against overly simplistic rules
in monetary policy.
The money supply statistics are notoriously noisy in that they are subject to
a wide range of seasonal, cyclical, secular, and, at times, seemingly random
changes. As a result, the money supply statistics are— like many other economic
statistics, such as the gross national product— subject to often substantial afterthe-fact revision. Indeed, at times, these after-the-fact revisions in money
statistics can materially alter the apparent setting in which policy decisions are
made. That is, at any meeting of the Federal Open Market Committee, the
Committee’sjudgments about the appropriate prospective growth of money will
be influenced by the rate of money growth registered for the several preceding
months as then recorded in the current money supply data. But the then
observed rate of money growth may, after revisions, change in ways that are not
inconsequential. For example, in three of the seven years between 1975 and 1981.
after- the-fact revisions in the growth of M1covering the first half of the year

changed the then observed Ml annual growth rate for the period by at least 2
percentage points.
More recently, the combination of revised seasonal adjustment factors and
benchmark data revisions for the year 1983 materially altered the month-tomonth changes in money growth during the year. Moreover, for the August
through November interval, these revisions raised the rate of money growth from
what, at the time, seemed to be very modest rates of expansion. For example, over
each month in that four-month period, the annual growth rate of M1was raised
by amounts ranging from 2.3 to 4.3 percentage points. This experience, like many
that have preceded it and others that will follow7 illustrates the need to
it,
interpret money supply statistics with considerable care and to keep at least one
eye on a broad spectrum of events regarding monetary, financial market, and
economic developments.
The case for this broad perspective is reinforced by more recent develop­
ments relating to banking deregulation and financial innovation. For example, as
illustrated in figure 2, as recently as year-end 1978, virtually all M1balances
earned no explicit interest, whereas by year-end 1983, only three-fourths of such
balances earned no interest. In the case of M2, the shifts are even more dramatic
in that only 18 percent of that aggregate are now non-interest earning and in
excess of 60 percent of M2 balances now pay a market rate of interest. Moreover,
the share of such balances paying market interest rates will continue to grow,
particularly when— as seems likely— the statutory prohibition on paying
interest on demand deposits is eliminated.
The potential consequences of these shifts in the interest rate character­
istics of M1and M2 for money supply control and for monetary rules are
enormous. Indeed, all of our ingrained rules of thumb and our more formal
mathematical and econometric relationships between changes in open market
operations and the behavior of the money supply and, in turn, between changes

The potential consequences of
these shifts in the interest rate
characteristics of Ml and M2
for money supply control and
for monetary rules are enor­
mous.

Figure 2 Money Supply Composition: 1978 and 19831
%ofM,

%of M2

1978

1983

1978

1983

(D e c .)

(D e c.)

(D e c.)

(D e c.)

%

'Breakdowns for bot h 1978 and 1983 are based on current definitions of Ml and M2
Source: Federal Reserve Bank of Minneapolis




9

... these changed properties of
the money supply will pose
major uncertainties about how
both the money supply and the
economy respond to central
bank policy changes.

The costs associated with
interest rate volatility are not
easy to judge.

10



in the money supply and changes in nominal GNP are based on experience in
which all or most money balances paid no interest or paid a restricted rate of
interest. In such a setting, policy-induced changes in interest rates altered the
opportunity cost of holding money balances which, in turn, altered the growth
rate of the money supply. Clearly, these relationships— which were never all that
precise— will change as progressively more money balances pay interest and,
particularly, pay interest at a market rate.
All other things being equal, these new interest rate properties of the
money supply will probably make money growth rates less responsive to changes
in central bank policies even though changes in central bank policies— working
through interest rates— might have a more immediate and powerful impact on
economic activity. In part, just how things work out will depend on how banks
and other depositories price money balances over the interest rate cycle—
something we have no real experience with to date. If, for example, banks move
up rates paid on M1and M2 balances in lockstep with increases in market
rates— a pattern of behavior which is not at all implausible— the historic
slowing of money growth associated with tighter monetary policy may not mater­
ialize except under conditions of dramatically higher interest rates. However, the
consequences for the economy of the changes in or the levels of interest rates
needed to produce a given growth rate of money may be very different in the
future than in the past.
In short, financial innovation and deposit deregulation have altered— and
will continue to alter— the interest rate properties of the money supply. Now,
and for some considerable time into the future, these changed properties of the
money supply will pose major uncertainties about how both the money supply
and the economy respond to central bank policy changes. In such a setting and in
the face of the money supply data problems discussed earlier, adherence to a
strict monetary rule would entail sizable risks of interest rate instability and
instability in the economy itself.
The preceding illustrations of the statistical imperfections of the money
supply data and of the changing analytical properties of the money supply would
be less troubling if the costs of achieving stable or at least more stable money
growth were low and if the relationship between money growth and economic
activity was relatively stable. However, experience— particularly recent
experience— raises real questions in both of these areas. That is, given income,
variations in the demand for money around some average rate of growth can be
eliminated or minimized only by changes in interest rates that are large enough
or frequent enough to offset changes in money growth stemming from all other
forces. Of course, some of the variability in money growth may come from the
supply side by virtue of such factors as shifts in deposits among classes of
deposits carrying different reserve requirements. However, even if these supplyside forces could be completely neutralized, demand shocks would still produce
considerable money variability which could only be eliminated by interest rate
variations. Moreover, the degree of variability needed to smooth out such
changes is likely to be greater in the light of the changing interest rate character­
istics of the money supply than it was when most money balances paid no
interest.
The costs associated with interest rate volatility are not easy to judge. If, for
example, efforts to achieve greater stability in money growth could produce that
result in a context in which only interbank rates and other very short-term rates
r
demonstrated greater volatility, the costs might not be all that great. However.

experience over the post-1979 period would suggest that greater variability in the
very short end of the yield curve is quickly transmitted out over the yield curve.
Moreover, even if that were not so, it is by no means clear that interest rate
changes could alter the public’s portfolio decisions in a way that could materially
affect the relative amount of money balances held. At the same time, it does seem
fair to suggest that experience with periods of high interest rate variability does
entail some direct costs. For example, in such an environment, the risk premium
built into the rate structure probably means that interest rates are at least
marginally higher than they otherwise would be. Similarly, interest rate insta­
bility seems to inhibit orderly business planning. Finally, given the contemporary
importance and workings of foreign exchange markets, interest rate volatility
also adds instability to international markets and money flows.
Stable money growth is theoretically preferable to variable money growth,
but reality is such that money growth will tend to be quite erratic, at least over
periods of months and even over periods of quarters. Some of that instability in
money growth could be eliminated by central bank actions but at the cost of
greater instability in interest rates. How far one should go in the direction of
incurring the costs of interest rate instability should be judged in part by the
stability of the money-GNP relationship. Stated differently, one might be consid­
erably more tolerant of the short-run costs of interest rate instability if the
income velocity of money were stable enough to provide a reasonable pattern of
economic activity over time.
Over very long periods of time, the income velocities of M1and M2 display
fairly stable properties. However, over periods of several quarters or even a year
or two, velocity behavior can depart materially from its long-term trend. Over the
past two years, for example, the normal patterns of income velocity (if it has, in
fact, any normality) broke down very badly, thereby further complicating the
task for monetary policy and rendering even less useful strict money rules. For
example, throughout 1982 and into early 1 8 3 the velocity of money declined
9-,
steadily and sharply. Velocity drops of such magnitude over such a long period of
time are unprecedented in the postwar period. That cold statistical fact does not,
however, begin to capture the dilemma for the policymaker posed by the collapse
of velocity during that period.
To put that dilemma in perspective, at the outset of 1 8 3 an assumed or a
9-,
targeted 6 percent growth rate of M1over the year could have had very different
implications for the economy, depending on the assumption about velocity which
accompanied the money growth target. And, to make matters worse, one could
have constructed several very plausible hypotheses about prospective velocity
behavior in 1983. For example, it could have been argued that velocity— under
the influence of continued precautionary deposit building and deregulation—
would continue to decline; it could have been assumed that velocity would grow
at its trend rate of 3 percent; or it could have been concluded that, in the face of a
relatively weak economic outlook and relatively high interest rates, velocity
would not change. In short, at the outset of 1983, it could have been reasonably
concluded that a 6 percent rate of money growth over the year would have been
accompanied by a 3 percent drop in velocity, a 3 percent rise in velocity, or no
change in velocity. By extension, the associated rise in nominal GNP could have
ranged from a low of 3 percent to a high of 9 percent (see figure 3). Moreover,
within that range of plausible results for nominal GNP. it would have been equally
possible to envision conditions in which real growth for the year was virtually flat
or quite robust. The same, of course, could be said about the inflation rate.




Over the past two years, for
example, the normal patterns
of income velocity (if it has, in
fact, any normality) broke
down very badly...

... in those circumstances, it
would seem imprudent to
focus on one policy variable to
the exclusion of all others and
to the exclusion of what was
developing in the economy.

li

Figure 3 Alternative GNP Growth Rates for 1983
Billions
ofS

A world in which monetary
policy can be reduced to a
simple rule or two seems very
appealing. Unfortunately, we
don’t live in that kind of world.

Source: Federal Reserve Bank of Minneapolis

... if a suitably flexible policy
of monetary discipline is
indeed a necessary condition
for economic prosperity and
stability, it does not follow that
it is a sufficient condition to
insure those results.

12



Faced with those circumstances, little consolation could be drawn from the
possibility or even the likelihood that velocity might— a year or two later—
return to its trend. Similarly, in those circumstances, it would seem imprudent to
focus on one policy variable to the exclusion of all others and to the exclusion of
what was developing in the economy. This is not to suggest that we can or should
attempt to fine tune policy or the economy. But it is to suggest that the process of
policy formulation and execution must take account of a broad range of
monetary, financial, and economic developments.
In short, the experience of the past fewyears points to serious short­
comings of strict monetary rules. The inherent limitations in the money supply
statistics, the changing interest rate properties of the money supply, the
breakdown in the money- income relationship, and the potential costs of
greater— if not considerably greater— interest rate volatility all suggest that
rules won’t work. A world in which monetary policy can be reduced to a simple
rule or two seems very appealing. Unfortunately, we don’t live in that kind of
world.
The straightforward implication of this is that the policy process must be
sprinkled with a generous dose of judgment and flexibility and a willingness to
adjust policy and policy targets as changing economic and financial develop­
ments warrant. This view as to what can realistically be expected of monetary
policy should not be and need not be seen as running contrary to the underlying
precept that persistent discipline in the money and credit creation process is and
will remain a necessary condition for sustained noninflationary economic
growth.
However, if a suitably flexible policy of monetary discipline is indeed a
necessary condition for economic prosperity and stability, it does not follow that
it is a sufficient condition to insure those results. Monetary policy does not
operate in a vacuum. Thus, even if monetary policy alone can force, at least for a

time, the result of price stability, the overall economic and financial environment
within which that result is achieved will be quite different depending on other
circumstances, the most important of which is fiscal policy. Indeed, in the
context of a fiscal policy outlook characterized by a secular pattern of large struc­
tural budget deficits, the economic and financial conditions associated with a
persistently disciplined monetary policy are not attractive. On the one hand, in
those circumstances, a persistent discipline in monetary policy entails very high
risks of stop-and-go growth patterns, relatively low capital formation rates, a
shift in the composition of output toward the government sector, and periodic
collisions between public and private borrowing needs with the ever present
danger of collisions turning into crunches. On the other hand, a monetary policy
which accommodates or cushions such deficit-induced credit market collisions is
a policy which entails the equally high— if not higher— risks of more inflation
and instability down the road. Thus, a realistic view of what can reasonably be
expected of monetary policy must take into account the overall framework
within which monetary policy must function— a framework which is most
importantly shaped by fiscal policy.

Federal Budgets and
Macroeconomic Policy
Given the importance of fiscal policy for economic stabilization and for the
way in which monetary policy influences the economy, it would be useful to place
the current and widely publicized deficit problem of the United States in some
historical perspective with regard to its origins, its size, and its implications for
the future. That historical perspective must start with an appreciation of the
views about fiscal policy that were popular in the m
id-1960s. In that time frame,
there was a belief in many circles that fiscal policy was a powerful— if not all
powerful— and flexible tool of economic policy. Every student of economics
carefully digested the spoken and written word about inside lags, outside lags,
and the relative size of various tax and spending multipliers in a context in which
it was perceived that spending or tax policies could and would be quickly and
easily altered to meet any cyclical contingency. In that setting, some suggested
that the budget would at least balance in periods of high employment, so struc­
tural deficits would not occur. Others almost seemed to suggest that the bigger
the deficit the better, while still others suggested that the size of the deficit was
largely irrelevant,
That earlier debate about the role of fiscal policy and the significance— if
any— of budgetary deficits is not relevant to the main issues of today. That is
partly because we are now faced with the prospect of a string of large structural
deficits and partly because the dimensions and characteristics of the budgetary
problem have changed materially from the situation of the mid-1960s and even
the early 1970s. Indeed, it now seems that the federal budget and our budgetary
problems have taken on a structural and an institutional character that both
reflect and contributed to the economic problems of the period. That is, over an
extended period of time, the character of government spending and tax policies
seems to have developed a bias toward less discretion, larger deficits, and more
inflation.




That earlier debate about the
role of fiscal policy and the
significance— if any— of bud­
getary deficits is not relevant
to the main issues of today.

.. .the character of govern­
ment spending and tax poli­
cies seems to have developed a
bias toward less discretion,
larger deficits, and more
inflation.

13

A look back at federal budgetary trends over the past two decades or so
reveals that these structural problems in our budgetary affairs became visible in
the m 1970s even though their roots may be traced further back. For example,
idbetween the mid-1960s and the mid-1970s, budget outlays as a percentage of GNP
tended to average around 20 percent, with deviations from that average being
largely cyclical in nature (see figure 4). Similarly, receipts tended to run at about
1 percent of GNP, with some cyclical ups and downs. Thus, while deficits were
9
not new by the mid-1970s, the size of the deficit relative to GNP— particularly in
years of relatively good economic performance— was not alarming to many.
Moreover, until the mid-1970s, the federal debt held by the public relative to GNP
continued to trend strongly downward. Thus, until the mid-1970s the deficit
problem, while very real, was of somewhat manageable proportions and in years
of relatively high employment was not of overwhelming size in absolute or
relative terms.
Beginning in the mid-1970s, however, the visible cnaracter of the budgetary
situation began to change in ways that had its roots in the simultaneous occur­
rence of high unemployment and high inflation. For example, until the m
id-

Figure 4 Federal Government Finances as a Percent
of Gross National Product, 1966-87

Beginning in the mid-1970s,
however, the visible character
of the budgetary situation
began to change in ways that
had its roots in the simultane­
ous occurrence of high unem­
ployment and high inflation.

14



Fiscal
Year
16
96
16
97
16
98
1 69
9
1 70
9
17
91
17
92
1 73
9
17
94
17
95
1 76
9
1 77
9
1 78
9
17
99
18
90
18
91
18
92
18
93
1984e
1985e
1986e
1987e

Budget
Receipts
1 .1
8
1 .2
9
1 .4
8
20.5
1 .9
9
1 .1
8
1 .4
8
1 .4
8
1 .1
9
1 .9
8
1 .2
8
1 .1
9
1 .1
9
1 .7
9
2 .1
0
20.8
20.2
1 .6
8
1 .8
8
1 .2
9
1 .3
9
1 .3
9

1Deficit every year except 1969
2End of year
e = Estimate
Source: Office of Management and Budget

Budget
Outlays
1 .6
8
20.3
21.4
20.2
20.2
20.4
20.4
1 .6
9
1 .5
9
22.5
22.7
22.0
21.9
21
.4
22.9
23.5
24.4
25.0
24.4
24.2
23.7
23.4

Budget
Deficit or
Surplus1
.5
1
.1
3.0
.4
.3
2
.2
2
.1
1
.2
.4
3
.6
4.5
2
.9
2
.8
1
.7
2
.9
2
.7
4.2
6.4
5
.6
5
.0
4
.4
4
.1

Federal
Debt2
36.5
34
.5
34.8
30.7
29
.4
29.5
28
.7
27
.4
2 .1
5
26.8
29,3
29
.6
29.2
27.3
27.8
27.6
30
.4
35
.4
37
.2
39.0
40.2
41.2

1970s, the conventional wisdom suggested that higher rates of inflation would
reduce the deficit— a pattern evident over the typical business cycle. However,
as inflation mounted over several cycles, decisions were made to fully index
many government spending programs, and gradually— but inevitably— interest
rates and interest costs moved up with the reality of higher inflation. In that
setting, inflation no longer worked to reduce the deficit and may in fact now tend
to increase the deficit. This was another of the insidious ways in which the costs
of inflation took their inevitable and heavy toll on economic performance and
prospects. Moreover, in the face of high unemployment, the traditional spending
side pressures on the deficit were ever present in a circumstance in which it was
increasingly difficult to rationalize deficit-reducing measures even for the so
called out years.
By the early 1980s, these changed characteristics of the budget were deeply
entrenched and were then coupled with a series of changes in tax and spending
policies which, though they helped spur the economic recovery, also interacted
with earlier developments to further alter the long-term budgetary situation. As
a result of this long and complex series of interactions, we are now facing a
situation in which the financial implications of the budget deficit and the ongoing
costs of financing the federal debt have taken on an ominous character for the
decade of the 1980s.
While the broad origins and dimensions of the current budgetary problem
are widely recognized, there are two specific aspects of the budgetary situation
which can help illustrate the manner in which a long history of events and
policies is now influencing the size of the deficit. They are the changed size and
importance of so-called tax expenditures and the future implications of interest
costs on the deficit itself and on economic prospects.
Tax expenditures, in the words of the United States Budget in Brief, 1985
( P - 62),

As a result of this long and
complex series of interactions,
we are now facing a situation
in which the financial implica­
tions of the budget deficit and
the ongoing costs of financing
the federal debt have taken on
an ominous character for the
decade of the 1980s.

are features of the individual and corporation income tax laws that provide special
benefits or incentives in comparison with what would be permitted under the
general provisions of the Internal Revenue Code. They arise fromspecial exclu­
sions, exemptions, or deductions fromgross incom or fromspecial credits,
e,
preferential tax rates, or deferrals of tax liability.
Tax expenditures are so designated because they are one means by which
the Federal Government carries out public policy objectives; in many cases, they
can be considered as alternatives to direct expenditures. For example, investment
in capital equipment is encouraged by the investment tax credit; a program of
direct capital grants could also achieve this objective. Similarly, State and local
governments benefit from both direct grants and the ability to borrow funds at taxexempt rates.
In short, tax expenditures are an alternative to direct government spending, but
they may also be thought of as foregone tax collections or a form of entitlement
program in which the test of entitlement is any one of a myriad of possible
circumstances. Regardless of how tax expenditures are labeled, to the extent
they are increasing, they tend to add to the deficit and to the Treasury’s external
financing requirements in much the same way as do direct spending programs
and tax rate reductions.
Tax expenditures are of interest and importance not only because of their
implications for the deficit as such, but also because, in the aggregate, they are
suggestive of opportunities to reduce the deficit by broadening the tax base.
Further, aggregate tax expenditures, viewed in the light of conventional budget




1
5

Figure 5 Tax Expenditure Growth
Selected Calendar Years 1967-1973 and Fiscal Years 1975-19851

1975

1977

1979

1981

1982

Est
1985

1967

1969

1971

1973

36.6

46.6

51.7

65.4^ 9 2 . 9 Jt 3 ,5

Federal Outlays

20.5

23.7

22.3

24.3

28.5

28.2

30.3

34.6

34.6

39.8

Federal Revenues

23.8

24.1

24.8

24.7

33.1____31.7

32.3

37.9

40.8

50.4

21.4

20.3

20.6

19,5

22.0

20.9

23.1

24.2

23.7

Tax Expenditures
(in billions of dollars)

149.8 228.6 253.5 369.3

Tax Expenditures
as a Percent of:

Federal Outlays
as a Percent of:
Gross National
Product (GNP)

21.6

'D ata for 1967-1982 taken from Table 3. Tax E x p en d itu res: B u d g et C ontrol O ptions a n d Fire-Year B udget Projections

f o r F iscal Years 198-3-1987. Congressional Budget Office ( C B O ). November 1982; tax expenditure estimate fur 19*5
taken from Appendix A. Tax E x p e n d itu re s: C u rren t Issues a n d Five-Year B u d g et P ro jectio n sfo r Fiscal Years 1984-1988.
CBO, October 198:3: and federal outlays, receipts, and G N P estimates for 1985 taken from Table {.B a se lin e B u d g e t
Projections f o r Fiscal Years 1985-1989. CBO, February 1981
Source: Congressional Budget Office

totals, probably provide a better picture of the overall size of governmental
presence in economic affairs.
Historically comparable data on tax expenditures are not easy to come by.
in part because the calculations needed to make such estimates are inherently
difficult. Moreover, even the data that are available must be treated with care,
particularly when aggregated relative to the budget or to GNP. However, the data
limitations notwithstanding, the growth and sheer size of tax expenditures
speak for themselves (see figure 5). For example,
□ In 1967, it is estimated that tax expenditures were about 20 percent of
federal outlays; by 1977, they were about 28 percent of outlays; and in 1985.
they are expected to amount to an astonishing 40 percent of outlays.
□ In 1985, federal outlays are expected to be about 24 percent of GNP.
However, if tax expenditures are added to direct outlays, the combination
amounts to 33 percent of GNP.
□ The Economic Recovery Tax Act of 1981 as finally enacted contained net
new or increased tax expenditures which— based on then-current
estimates— would have reduced fiscal 1986 tax receipts by about $80
billion. While about $27 billion of these reductions were reinstated by the
Tax Equity and Fiscal Responsibility Act of 1982, the experience with the
1981 act illustrates the manner in which tax expenditures seem to find
their way into the tax code and in the process aggravate the already serious
deficit problem.
Thus, tax expenditures are now a major factor contributing to the overall
federal budgetary problem and in the aggregate are larger than any single line
item in the budget even though they do not directly appear in the budget. Indeed,
while each individual tax expenditure was designed to serve some wholly
reasonable public policy objective, the cumulative weight of all such expendi

1
6



tures is now a major element in the overall budget dilemma. Moreover, since
these programs— via their impact on the deficit— may contribute to higher
market interest rates, they can work at cross-purposes with their stated or
implied objective.
In the final analysis, the extent of the deterioration in the budgetary
situation may be best captured by what has happened and what will happen to
the size of the federal debt and by the interest costs of financing that debt. Of
course, a rising level of federal debt is not new, or unique to the United States.
However, during most of the postwar period, the rising level of the federal debt
was not a matter of pressing concern to most, in part because the debt relative to
GNP declined at a fairly steady rate and partly because interest costs as a
percentage of GNP or as a percentage of total federal outlays were fairly constant
and not at overly alarming levels. However, coincident with the structural deteri­
oration in the budget deficit and the inflation-induced higher level of interest
rates, the picture regarding the federal debt and the costs of financing that debt
began to change. Specifically,
□ The total federal debt, which reached $ trillion in 1981, could leap to
1
about $2.5 trillion by the late 1980s.
□ The federal debt held by the public as a percentage of GNP declined almost
steadily over the postwar period until 1974 when it stood at 25 percent.
Starting in 1975, however, the debt held by the public began to edge higher
and by the late 1980s could be well in excess of 40 percent of GNP
□ By sometime in the 1988-89 period, the interest costs on the federal debt
could exceed $200 billion per year even if interest rates trend down from
their current levels. At $200 billion annually, interest outlays would about
equal total 1980 federal outlays for education, health, Social Security, and
Medicare. To put it differently, interest costs could reach such proportions
as to crowd out other kinds of government spending programs.
□ Current and prospective payments of interest to foreign holders of Treasury
securities can no longer be ignored in terms of their wealth transfer effects
and their contribution to the current account situation of the United
States. Indeed, in 1983, interest payments to foreign holders of Treasury
securities amounted to $17.9 billion, thus virtually offsetting the $18.6
billion in new purchases of Treasury securities by foreigners during the
year. Stated differently, U.S. foreign capital inflows in 1983 directly used to
purchase additional Treasury securities served only to approximately
offset that part of the U.S. current account deficit stemming from the
Treasury’s interest payments to existing foreign holders of Treasury
securities.
As mentioned above, this unhappy outlook for federal debt and interest
costs will materialize even if interest rates trend down from their current levels
throughout the decade. However, with the public debt reaching about $2.5
trillion, the consequences of changes in interest rates on financing costs are
staggering. For example, with the debt at $2.5 trillion, a 2 percentage point
increase in the Treasury’ average borrowing costs would— over a roughly threes
year period— raise interest costs and the deficit $50 billion per year. Of course, a
2 percentage point reduction would lower those costs by the same amount— a
powerful argument in its own right for keeping inflation under control.
All of the preceding estimates of the outlook are essentially based on
economic assumptions which call for (1) steady growth in real output at a rate of




... coincident with the struc­
tural deterioration in the
budget deficit and the inflation-induced higher level of
interest rates, the picture
regarding the federal debt and
the costs of financing that
debt began to change.

... U.S. foreign capital inflows
in 1983 directly used to pur­
chase additional TVeasury
securities served only to
approximately offset that part
of the U.S. current account def­
icit stemming from the Trea­
sury’s interest payments to
existing foreign holders of
TVeasury securities.

17

.. .while there is room for
debate about particulars and
quantities, there can be little
doubt that the overall financial
implications of the deficit out­
look are not good.

about 4 percent between 1983 and 1989, (2) inflation holding in a range of
between 4 and 5 percent over the decade, and (3) interest rates trending down
modestly over the period. Using moderately different but still reasonably
optimistic assumptions, we can easily arrive at budget estimates which would
place the decade-ending deficits at $300 billion rather than $200 billion.
The financial implications of these prospective deficits and their implica­
tions for monetary policy are difficult to anticipate in part because we are facing
a situation that is without precedent. This is particularly true in the current
setting in which a substantial fraction of the deficit is being financed— directly
or indirectly— from abroad. The financial implications of the prospective
deficits truly are uncharted territory. However, while there is room for debate
about particulars and quantities, there can be little doubt that the overall
financial implications of the deficit outlook are not good. Given an appropriately
disciplined noninflationary monetary policy, the aggregate supply of credit is
relatively fixed on a year-to-year basis. Relative to GNP, it can be augmented only
by higher rates of savings by individuals, businesses, or other economic agents
(such as state and local governments) or by increased capital inflows from
abroad. In the current circumstances, it would seem highly imprudent to assume
or conclude that the next few years will bring any sizable increase in credit flows
from higher saving rates or from increased capital inflows from abroad. Indeed,
taking account of recent patterns of capital inflows, a good case can be made that
the net funds available to finance domestic needs— including the deficit—
might decline even if there is some improvement in domestic savings flows. In
either case, the prospective deficits are simply so large that it is highly unlikely
that they can be financed year in and year out in the context of a smoothly
functioning economy and smoothly functioning money and capital markets.

Looking to the Future
At the outset of this essay, it was suggested that a review of developments
over the past fifteen years could help clarify a vision of the future in which the
mistakes of the past could be avoided and prospects for lasting prosperity accord­
ingly enhanced. In that spirit, the experience of the past points to several broad
considerations which should play a major role in our thinking about the future of
the economy and about future economic policy.

Inflation cannot be tolerated.

18



■ Inflation cannot be tolerated. That is, it seems clear that the subpar
economic performance of the past can— in a major way— be traced to the
attempt to live with inflation and to the resulting instabilities that grew out
of a long period of essentially escalating inflation. The goal of price stability
and the goal of high employment are, in the final analysis, complementary,
not competing. What we face is not a tradeoff; nor is it an either/or
situation in which our priorities can— in any meaningful way— shift from
one goal to the other, even though in the short run there will inevitably be
periods in which emphasis and tactics should vary with changing condi­
tions. That balanced view of economic priorities requires a greater capacity
and willingness to take and to maintain the longer look and to recognize

that discipline in the short run offers the best hope of prosperity in the long
run. More specifically, that balanced view of economic priorities requires
that we do not again fall victim to the illusion that we can secure growth
and stability for tomorrow by accepting more inflation today.
■ There are no simple formulas for economic prosperity. The economy and
expectations about the performance of the economy are simply too
complex to assume that simple and inflexible rules hold the key to
economic success. No single element of economic policy— no matter how
well conceived and executed— can simply override all other aspects of
economic policy and economic events. Thus, just as we need a balanced
approach to our economic goals, we need a balanced approach to economic
policy, one in which the major arms of economic policy are working in a
complementary manner.

There are no simple formulas
for economic prosperity.

■ Productivity growth must be strengthened. Productivity growth is the
lifeblood of a growing economy and rising standards of living. In turn,
strong and lasting gains in productivity ultimately have their roots in high
rates of capital formation and innovation— conditions that are not likely to
prevail in an environment of high inflation, or an environment in which
incentives are tilted toward consumption and borrowing. In other words,
the goals of high employment and price stability are more likely to be
reached and maintained when productivity is strong even if a shift in policy
emphasis aimed at securing higher savings and capital formation may, in
the short run, imply somewhat slower growth in employment.

Productivity growth must be

■ Monetary policy is not a panacea. Monetary policy is a powerful tool of
economic stabilization, but it cannot— by itself— insure prosperity.
Indeed, even under the best of conditions, monetary policy is a blunt and
imprecise instrument. Yet, persistent discipline in monetary policy is a
prerequisite to noninflationary growth. Achieving that discipline is facili­
tated in a setting in which the monetary authorities establish operating
targets which can serve as a guide to policy. While a host of variables
ranging from interest rates to total credit flows can serve this purpose, the
broad objectives of monetary policy will be best served when the behavior
of the family of money and credit aggregates remains the central opera­
tional focal point for monetary policy. However, the characteristics of
money supply data and their changing relationships with economic activity
are such that overly simplistic monetary rules should be avoided. Stated
differently, the formulation and execution of monetary policy must take
account of a full range of monetary, financial, and economic developments.
The limitations of monetary policy notwithstanding, efforts can be
made to improve the reliability of monetary data and thus their usefulness
to the Federal Reserve and to market participants. Specifically, the
payment of interest on reserves would minimize the incentives for shifting
money balances into nonreservable instruments inside or outside banking
organizations. Such a scheme would also permit the simplification of the
structure of reserve requirements, thus potentially strengthening the
relationship between reserves and money. Similarly, in those circum­
stances, it might be possible to broaden reserve coverage with a view
toward a somewhat greater degree of control over the broad monetary
aggregates. These institutional changes might help to improve some of the
technical characteristics of money and monetary policy, but they will not

Monetary policy is not a




strengthened.

panacea.

19

fundamentally change the inherent limitations of monetary policy. The
case for judgment and flexibility will remain, as will the case for a balanced
approach to stabilization policy in which monetary and fiscal policies work
in tandem.

The federal deficits must be
substantially and quickly
reduced.

■ Thefederal deficits must be substantially and quickly reduced. As things
now stand, the federal budgetary situation is a distinct threat to domestic
and international financial stability and a threat to the sustainability of the
business recovery in the United States. The choice of the best strategy for
reducing the deficits is essentially a political, not an economic matter.
However, the economics of the situation do, in the most general terms,
suggest that
— we should try to achieve as much of the adjustment as possible on the
spending side.
— if the full amount of the necessary adjustment cannot be made on the
spending side— as seems a distinct possibility— then we must be
prepared to look at tax policies. In looking at tax policy, the sheer
magnitude of tax expenditures is now such that it may be possible to
design measures that would have the complementary effects of raising
revenues, simplifying the tax structure, and working in the direction of
creating new incentives for savings— or, at least, reducing some of the
present incentives for consumption.
Both experience and economic theory tell us that moving in the directions
outlined above should distinctly improve the odds that the solid economic
performance of 1 8 3can be extended well into the future. Those odds can be
9enhanced further by a renewed commitment to less regulation, freer markets at
home and abroad, and strengthened cooperation among labor, management, and
government. However, experience also tells us that there is no perfect guide to
the future. Economic relationships are not carved in stone, and economic institu­
tions are not fixed in time. Thus, a pragmatic view of the future is one that must
be sensitive to the limitations as well as the value of various economic theories
without losing touch with institutional reality. Durable economic prosperity does
not come easily, but it will come easier if we maintain a basic discipline in public
policy while avoiding the temptation to attach too much weight to a single
economic variable or a single economic theory.

20







Statement of Condition
Earnings and Expenses
Directors
Officers

Federal Reserve Bank of Minneapolis

Statement of Condition

(In thousands)
December 3 ,
1
1983

December 3 ,
1
1982

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

$ 143,000
328,907

$ 154,000
(275,293)

61,000
20,373
48,900

61,000
19,333
8,500

105,810
1,842,738

112,605
1,708,669

$1,948,548

$1,821,274

469,262

687,718

35,503
132,768
74,189

36,711
213,268
52,408

$3,262,450

$2,778,919

Federal Reserve Notes
Deposits:
Depository Institutions
Foreign
Other Deposits

$2,296,437

$1,758,265

393,522
5,400
3,459

414,348
7,770
21,898

Total Deposits

$ 402,381

$ 444,016

430,860
31,730

451,113
27,557

$3,161,408

$2,680,951

$

50,521
50,521

$

48,984
48,984

$ 101,042

$

97,968

$3,262,450

$2,778,919

Total Securities
Cash Items in Process of Collection
Bank Premises and Equipment—
Less: Depreciation of $15,322 and $12,652
Foreign Currencies
Other Assets
Total Assets

Liabilities

Deferred Availability Cash Items
Other Liabilities
Total Liabilities

Capital Accounts
Capital Paid In
Surplus
Total Capital Accounts
Total Liabilities and Capital Accounts

22




Earnings and Expenses

(In thousands)

For the Year Ended December 3
1

1983

1982

$ 3,037

$ 5,720

186,220
9,857
28,609
167

204,995
15,911
21,181
277

$227,890

$248,084

$ 23,642
6,155
5,120
993
1,562
2,158
1,005
842

$ 20,738
5,371
4,999
1,003
1,325
1,808
958
818

5,096
4,049
3,442
1,154

4,410
1,829
3,148
441

$ 55,218

$ 46,848

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

Current Expenses
Salaries and Other Personnel Expenses
Retirement and Other Benefits
Postage and Shipping
Communications
Printing and Supplies
Real Estate Taxes
Depreciation— Bank Premises
Utilities
Furniture and Operating Equipment—
Rentals, Depreciation, Maintenance
Cost of Earnings Credits
OtheY Operating Expenses
Shared Costs Received from Other FR Banks
Total

(2,522)

Reimbursed Expenses
Net Expenses

Current Net Earnings
Net Deductions1
Less:
Assessment by Board of Governors:
Board Expenditures
Federal Reserve Currency Costs
Dividends Paid
Payments to U.S. Treasury

(2,189)

$ 52,696

$ 44,659

$175,194
16,165

$203,425
4,474

2,560
3,125
2,983
148,824

2,252
1,631
2,889
190,038

1,537

$ 2,141

Surplus, January 1
Transferred to Surplus— as above

$ 48,984
1,537

$ 46,843
2,141

Surplus, December 3
1

$ 50,521

$ 48,984

Transferred to Surplus

$

Surplus Account

'This item mainly consists of unrealized net losses related to revaluation of assets denominated in
foreign currencies to market exchange rates.




23

Directors

Federal Reserve Bank of Minneapolis

William G. Phillips
John B. Davis, Jr.

l, 1984

Chairman and Federal Reserve Agent
Deputy Chairman

Class A Elected by Member Banks
Dale W. Fern
Curtis W. Kuehn
Burton P. Allen, Jr.

January

Term Expires December 3
1

Chairman and President, First National Bank, Baldwin, Wisconsin
President, First National Bank, Sioux Falls, South Dakota
President, First National Bank, Milaca, Minnesota

18
94
18
95
18
96

Class B Elected by Member Banks
William L. Mathers
Richard L. Falconer
Harold F. Zigmund

President, Mathers Land Company, Inc., Miles City, Montana
District Manager, Northwestern Bell, Bismarck, North Dakota
Chairman, Blandin Paper Company, Grand Rapids, Minnesota

18
94
18
95
18
96

Class CAppointed by Board of Governors
William G. Phillips
Sister Generose Gervais
John B. Davis, Jr.

Chairman, International Multifoods, Minneapolis, Minnesota
Administrator, Saint Marys Hospital, Rochester, Minnesota
President, Macalester College, St. Paul, Minnesota

18
94
18
95
18
96

Member of Federal Advisory Council
E. Peter Gillette, Jr.

Vice Chairman, Norwest Corporation, Minneapolis, Minnesota

18
94

Helena Branch
Ernest B. Corrick
Gene J. Etchart

Chairman
Vice Chairman

Appointed by Board of Directors FRB of Minneapolis
Harry W. Newlon
Seabrook Pates
Roger H. Ulrich

President, First National Bank, Bozeman, Montana
President, Midland Implement Company, Inc., Billings, Montana
President, First State Bank, Malta, Montana

18
94
18
94
18
95

Appointed by Board of Governors
Ernest B. Corrick

Vice President and General Manager. Champion International Corporation,
Timberlands-Rocky Mountain Operations. Milltown, Montana
Gene J. Etchart Past President, Hinsdale Livestock Company, Glasgow, Montana




18
94
18
95

Officers




Federal Reserve Bank of Minneapolis
E. Gerald Corrigan
Thomas E. Gainor
Melvin L. Burstein
Leonard W. Fernelius
Gary H. Stern
Sheldon L. Azine
Barbara J. Cox
Lester G. Gable
Phil C. Gerber
Bruce J. Hedblom
Douglas R. Hellweg
Ronald E. Kaatz
David R. McDonald
Preston J. Miller
Clarence W. Nelson
Arthur J. Rolnick
Charles L. Shromoff
Colleen K. Strand
James R. Taylor
Kathleen J. Balkman
Robert C. Brandt
James U. Brooks
Marilyn L. Brown
Evelyn F. Carroll
Richard K. Einan
Caryl W. Hayward
William B. Holm
Ronald 0. Hostad
Thomas E. Kleinschmit
Roderick A. Long
James M. Lyon
Susan J. Manchester
Kenneth C. Theisen
Thomas H. T\irner
Theodore E. Umhoefer
Joseph R. Vogel
William G. Wurster

January 1,1984

President
First Vice President
Senior Vice President and General Counsel
Senior Vice President
Senior Vice President and Director of Research
Vice President and Deputy General Counsel
Vice President
Vice President
Vice President
Vice President
Vice President
Vice President
Vice President
Monetary Adviser
Vice President and Economic Adviser
Vice President and Deputy Director of Research
General Auditor
Vice President
Vice President
Assistant Vice President and Secretary
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President and Assistant Secretary
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Chief Examiner
Assistant Vice President

Helena Branch
Robert F. McNellis
G. Randall Fraser

Vice President
Assistant Vice President

25

For additional copies contact:
Office of Public Information
Federal Reserve Bank of Minneapolis
Minneapolis, Minnesota 55480