Full text of Annual Report of the Federal Reserve Bank of Richmond : 1975 Annual Report

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1975 Annual Report










-■

f

u

To Our Member Banks:

W e are pleased to present the 1975 Annual Report of the Federal Reserve Bank
of Richmond.

The Report’s feature article deals with factors contributing to the

persistence of inflation.

The Report also includes highlights of the year, a

summary of operations, comparative financial statements, and current lists of
directors and officers of our Richmond, Baltimore, Charlotte, Columbia, and
Culpeper offices.

On behalf of our directors and staff, we wish to thank you for the cooperation
and support you have extended to us throughout the past year.




Sincerely yours

Chairman of the B o a r d

President

The
Persistence of
Inflation

Among- the most exasperating- and puzzling
of recent economic phenomena is the apparent
intractability of the inflation rate.
Once
started, an inflation becomes difficult to sub­
due. It seems to develop a momentum of its
own. independent of other basic econom ic con­
ditions. It resists or at best responds only slug­
gishly to traditional restrictive policies.
Its
persistence in the face of high unemployment
and excess capacity has resulted in the addi­
tion of the term stagflation to the econom ist’s
lexicon.
W hat accounts for the stickiness of the in­
flation rate? W h y is it so policy-resistant and
difficult to control? W h y is it so slow to de­
celerate even when demand is slack? Many
economists believe that the answers lie in the
mechanism through which inflationary im­
pulses are transmitted through the econom y.1
Embedded in this mechanism are certain de­
lays or lags that may slow the spread of infla­
tion over the total price structure and may also
prolong its duration. Particular prices that lag
behind general inflationary movements have to
catch up later to reestablish their relative posi­
tion in the price structure. This lag/catch-up
characteristic of the inflationary transmission
mechanism is offered by some as an explana­
tion of why strong upward pressures on prices
persist long after demand slackens.
The most important lags in the process
through which inflation is diffused through the
econom y are the price-adjustment lag and the
expectations-formation lag. The first refers to
the delayed response of the rate of price in­
crease to shifts in aggregate demand. Demand
pressure is transmitted to prices via a com pli­
cated and circuitous channel that runs from
output to inputs to input prices to costs and
finally to product prices. The price-adjustment
lag accounts for the time it takes for demand to
affect prices through the channel of costs. It
should be noted that many of these costs them­
selves adjust slowly, partly because they are
influenced by sticky price anticipations. These
sticky anticipations are described by the sec­
ond lag, which refers to the slowness with
which expectations of future inflation are re­
vised when individuals realize that actual infla1 See, for example, the studies by Cagan [1, 2, 3] and Laidler
[5, 6 ] .
See also the articles by Friedm an [ 4 ] and Selden [ 8 ] .
The present article draws heavily from Cagan and Laidler.

4




tion has tu rn ed ou t to b e d iffe re n t than w as
^ Y n e o tP f!

T^r*r ^ v a m - n l p J i m m p H i Q t p I v
---

fr»1 1n W 1 n iD
cr
-----

the ca u se, the in cre a se d rate o f sp e n d in g , if it
is to c o n tin u e , m u st
s u p p o rte d b v 3. sits-

p e rio d s o f ra p id ly a c c e le ra tin g in fla tio n , e x p e c ­

tained h ig h er rate o f m o n e ta ry g r o w th .

ta tion s a b o u t the fu tu re b e h a v io r o f p rices
c o n tin u e to re fle c t the p r e c e d in g p rice e x p e r i­
e n ce even th o u g h the cu rre n t rate o f in fla tion

o u t this c o n c o m ita n t m o n e ta ry g r o w th , risin g

m a y b e d e celera tin g .

S om e a n a ly sts p o in t to

th ese la g s as the reason that in fla tio n is so
p e rsiste n t and hard to su b d u e, even in th e fa ce

W it h ­

p rice s w o u ld s im p ly re d u ce the real va lu e of
e x is tin g cash b a la n ce s b e lo w th e lev el that
p e o p le d esire to h old . In an e ffo r t to rebu ild
th eir p ric e -e ro d e d real b a la n ces, ca sh h old ers
w o u ld cu t e x p e n d itu re s, th e re b y b r in g in g the

o f h ig h u n e m p lo y m e n t and e x ce s s c a p a city .

in fla tio n to a halt.

T h e p u rp o s e o f this a rticle is to e x a m in e the
p rice -a d ju s tm e n t and e x p e c ta tio n s -fo r m a tio n

in g c a n n o t b e m a in ta in ed fo r lo n g w ith o u t the
m o n e ta ry e x p a n sio n n e ce ss a ry to fin a n ce it.

la gs and to in d ica te h o w th e y m a y a ffe ct the
sp eed , p a ttern , and d u ra tion o f in fla tio n . T h e

A s s u m in g su ch e x p a n sio n o c c u rs , h o w e v e r , the
c o r r e s p o n d in g in crea sed rate o f sp e n d in g leads

a rticle p r o c e e d s in the fo llo w in g m an n er. F irst,
it id en tifies the lo ca tio n and d e s crib e s th e o p e r ­

to a b u ild -u p o f e x ce s s d em a n d s on th e e c o n ­
om y.
B u sin e s sm e n in itia lly re sp o n d to this

a tion o f the lag s in the in fla tio n a ry tra n sm is­
sion m ech a n ism .
S e co n d , it p r o v id e s an e x ­

b y re d u cin g in v e n to rie s and e x p a n d in g ou tp u t.

p la n a tion o f the e x iste n ce o f the la gs.

T h ir d ,

T h a t is, th eir in itial a d ju stm e n ts are to q u a n ­

an d

p o lic y

m o st

im p orta n t,

it a n a ly ze s

im p lica tio n s o f the lags.

the

F in a lly , th e a p p e n d ix

A n in crea sed rate o f sp e n d ­

risin g d em a n d n o t b y ra isin g p rice s b u t rather

t i t ie s ; p rice a d ju s tm e n ts c o m e later— h en ce the
s o -ca lle d p r ic e -a d ju s tm e n t lag.

co n ta in s a b rie f d e scrip tio n o f h o w th e lags

T h e stim u lu s to final o u tp u t r e s u ltin g fro m

are trea ted in sim p le a n a ly tica l m o d e ls o f the

th ese q u a n tity a d ju s tm e n ts is tra n sm itted b ack

in fla tio n a ry p roce ss.

to earlier sta g es o f p r o d u c tio n v ia in crea ses in
the d em a n d fo r la b o r and m aterial in pu ts, as

Sketch of the Inflationary Process

w ell as fo r in te rm e d ia te (s e m i-fin is h e d ) p r o d ­
u cts.

D e m a n d p ressu re passes d o w n w a r d to

T h e first o b je c t iv e is to d e s crib e the o p e ra tio n

lo w e r

sta g e s

o f th e la g s in the in fla tio n a ry m ech a n ism .

e s p e c ia lly th o se o f ra w

As

a n e ce s s a ry p relim in a ry , a b rie f d e scrip tio n o f
th e in fla tion p ro ce s s is o ffe r e d , w ith em p h a sis

of

p r o d u c tio n

w h e re

p rice s—

m aterials and oth er

b a sic c o m m o d itie s — are p a rticu la rly sen sitiv e
to in crea ses in d em a n d . T h e s e p rice s b e g in to

on th e tim e seq u e n ce or c h r o n o lo g ic a l o rd e r in

rise a lm o st im m e d ia te ly as d o certa in c o m p e ti­

w h ich k e y e c o n o m ic v a ria b les (s p e n d in g , o u t­

tive (n o n -u n io n ) w a g e s w h o s e a d ju stm e n t is

p u t, co sts, p rices, e x p e cta tio n s , e tc .) a d ju st to
in fla tio n a ry p ressu res.
T h e h y p o th e tic a l e x ­

n ot d e la y e d b y lo n g -te r m u n ion c o n tra cts or
c o lle c tiv e b a r g a in in g a g reem en ts.
S in ce the

a m p le p resen ted b e lo w m a y n o t c o n fo r m to all
o f the in fla tio n a ry e p isod es e x p e r ie n c e d in the

o u tp u t o f ea rlier sta g es o f the p r o d u c tiv e p r o ­
cess co n stitu te s the in p u t o f later sta g es, th ese
risin g w a g e s and p rice s pass b a ck up th ro u g h

U . S. a lth o u g h it p r o b a b ly ty p ifie s

m o st of

th em .

the in te rin d u s try stru ctu re in the fo rm o f in ­

A s a first a p p ro x im a tio n , the se q u e n ce of
ev e n ts in a ty p ic a l in fla tion m a y be d e scrib e d
as b e g in n in g w ith an in crea se in a g g r e g a te d e ­
m an d to a lev el in e x ce ss o f the e c o n o m y ’s
c a p a c ity to p ro d u ce . S u ch a ste p -u p in th e rate
o f sp e n d in g m ig h t stem fro m a n y o f a v a rie ty
o f ca u ses in c lu d in g : (1 ) an in crea se in the
g o v e r n m e n t ’s b u d g e ta r y d e fi c it s ; (2 ) an e p i­

crea sed co s ts.
In sh ort, dem an d p ressu re is
tra n sm itted d o w n w a r d th u s in v o k in g c o s t in ­
crea ses that rip p le u p w a rd u ntil th e y fin a lly
reach the fin ish e d p r o d u ct stage.
n essm en , o p e r a tin g w ith fix e d

H e re b u s i­
p e rce n ta g e

m a rk u p s o v e r co sts, pass th ese c o s t in creases
on in th e fo rm o f h ig h e r p rices. T h e s e p rice
in crea ses in d u ce w o r k e r s o p e r a tin g u nder c o l­

s o d ic e x p a n sio n in p riv a te s p e n d in g a sso cia te d ,
say, w ith a m a jo r in n o v a tio n ; and (3 ) an a c ­

le ctiv e b a r g a in in g a g re e m e n ts to b a rg a in fo r

cele ra tio n

tract.

eith er

in

the

a c tiv e ly

rate

of

e n g in e e re d

m o n e ta ry
or

p a s siv e ly

m itted b y the m o n e ta ry a u th orities.




g r o w th
p er­

W h a te v e r

c o s t o f liv in g in crea ses in the n ex t w a g e c o n ­
T h e re su ltin g in crea ses in la b o r co sts

are p a ssed

th ro u g h

in to

still

h ig h e r

p rices.

S u ch c o s t-in d u c e d p rice in crea ses, o f co u rse ,

5

co n stitu te the d e la y e d p rice re sp o n se to the
p rio r sh ift in d em a n d .

In th e p ro ce ss ju st d e s c r ib e d , th e ch ain o f

T h e s e c o s t and p rice

ca u sa tio n or pattern o f a d ju s tm e n t runs from

in creases p r o v o k e fu rth e r ro u n d s o f w a g e and

sp e n d in g to o u tp u t to c o s ts to p rice s to e x ­

p rice in crea ses that add im p e tu s to the in fla ­
tion th ro u g h the ch a n n e l o f co sts.

p rice s.

It sh ou ld be n o te d th at the e x p e cta tio n s lag
is in o p era tio n th r o u g h o u t th e e a rly and in te r­
m ed iate sta g es o f th e in fla tio n .

P r ic e -a n tic i-

p a tion s are b a sed on p e r c e iv e d tren d s and so
d o n ot ch a n g e q u ick ly .

B e ca u se th ese tren d s

are estim a ted la r g e ly fro m p a st e x p e rie n ce , it
takes tim e to a d ju st e x p e c ta tio n s to
cu rren t

rates

of

in fla tio n .

Thus

h ig h er

w h en

the

p e c ta tio n s and b a ck again to in p u t and p ro d u ct
T h is seq u en tia l p r o c e s s is rep resen ted

sc h e m a tica lly in the c h a rt,w h ic h

a lso sh o w s

the lo ca tio n o f the p r ice -a d ju s tm e n t and e x p e c ­
ta tio n s lags.

It sh ou ld be e m p h a sized , h o w ­

ever, th at an im p o rta n t co n s tra in t ex ists to the
co n tin u o u s op e ra tio n o f this p r o c e s s.

S p e c ifi­

ca lly , the p ro ce ss ca n n o t co n tin u e u nless it is
c o n s ta n tly refu eled w ith a d d itio n a l su p p lies o f

a ctu al rate o f in fla tio n b e g in s to rise, the e x ­

m oney.

p e cte d rate is n ot im m e d ia te ly a ffe cte d .

a u th o ritie s to d e n y this fu el w ill e v e n tu a lly

O n ly

after the actu al rate has e x c e e d e d the e x p e cte d
rate fo r a tim e w ill th e latter start to rise.

A d eterm in ed stan d b y th e m on eta ry

b r in g it to a halt.

B ut

it w ill rise s lo w ly at first b e ca u se it co n tin u e s
to re fle ct the lo w e r past rates o f in fla tion .

The Winding-Down Process

E v e n tu a lly , h o w e v e r , the e x p e c te d rate rises

The

fa ster and fa ster as p e o p le b e c o m e a cclim a te d

co n tin u e to op e ra te even a fte r an e ffe c tiv e p r o ­

to th e h ig h e r a ctu a l rate and ad ap t their e x ­

g ra m

p ecta tio n s to it.

S p e n d in g slack en s, o u tp u t fa lls, and in p u t d e ­

O n c e a rou sed , in fla tio n a ry

lags d e scrib e d in the p r e c e d in g section
o f m o n e ta ry restra in t is im p lem en ted .

e x p e cta tio n s feed b a ck in to the cu rre n t rate o f

m a n d s d e c lin e ; b u t p rice s

in fla tion

seek to raise

tin u e u p w a rd b e ca u se re ce n t c o s t in crea ses are

p rice s and w a g e s at the sam e rate as th ey

still w o r k in g th eir w a y th r o u g h th e sy ste m and
b e ca u se in fla tio n a ry e x p e c ta tio n s c o n tin u e to

e x p e ct

as firm s
p rice s

in

and

u n ion s

g e n e ra l

to

rise.

At

this

sta g e o f the in fla tio n a r y p ro ce ss , w h e re c o st

m o u n t.

in crea ses are p a ss in g th ro u g h

th r o u g h o u t

in to p rice in ­

But

as

d em a n d

s u cce ss iv e

n e v e rth e le ss

p re ssu res

sta g e s

of

con ­

slack en

p r o d u ctio n ,

creases and the e x p e cte d rate o f in fla tio n is

the re s u ltin g w e a k e n in g o f co s ts

ris in g to ca tch up w ith the actu a l rate, the

leads to an easing- o f p rice s o f fin a l g o o d s and

m ain im p a ct o f th e in fla tio n a ry stim u lu s sh ifts

se rv ice s.

fro m qu a n tities to p rice s.

falls and rem ain s fo r a tim e b e lo w th e ex p e cte d

pu t

and

e m p lo y m e n t

T h e te m p o r a r y o u t ­

e ffe c ts

d im in ish ,

and

e v en tu a lly

A s the actu a l rate o f p rice in crease

rate, e x p e cta tio n s o f fu rth e r rises are g ra d u a lly

p u re ly in fla tio n a ry p rice e ffe c ts d om in a te. T h e

re v ise d d o w n w a r d .

lags, h o w e v e r, m a y b e

a d e term in a n t o f the actu a l rate, th e d ecrea se

lo n g ;

and

the p rice

S in ce the e x p e c te d rate is

that

o f the fo rm e r w ill p r o d u c e a fu rth e r d e ce le ra ­

m a y even e n co m p a ss a b u sin e ss re c e ss io n — to

sy ste m

m ay

take

se v e ra l

y e a rs— y ea rs

co sts

tion o f the latter.
B u t the p r ic e -a d ju s tm e n t
and e x p e c ta tio n s lags d ra w o u t th e w in d in g -

and p rices that h a v e la g g e d b eh in d the oth ers

d o w n p ro ce s s, and th e a ctu a l rate o f in fla tion

w ill h ave to ca tch up in o rd e r to re sto re the
e q u ilib riu m p rice re la tio n sh ip s d istu rb e d b y

s lo w ly .

co m p le te

all

th e in fla tion .

a d ju stm e n ts.

P a rticu la r

w ill c o n v e r g e on its n e w e q u ilib riu m lev el on ly

A ls o , at th e end o f a seriou s in ­

fla tion , in fla tio n a r y p s y c h o lo g y m a y co n tin u e
to ex ert u p w a rd p re ssu re on w a g e s and p rice s
even after o th e r b a sic p ressu res h a v e b e g u n
to dissip a te, sin ce it takes tim e fo r e x p e cta tio n s

Factors Retarding Price Adjustment
W h a t ch a ra cte ristics o f a m o d e rn e c o n o m y a c ­
c o u n t fo r the lags d e scrib e d in th e fo r e g o in g

to ca tch up w ith the a c ce le r a tin g p rice m o v e ­

s e c tio n s ?

m en ts o f the re ce n t past. T h is c a tch -u p p ro ce ss

lag, the a n sw e r is fa irly s tr a ig h tfo r w a rd .

In the case o f th e p ric e -a d ju stm e n t

m a y ex ten d

The

an e n s u in g rece ssio n ,

la g arises fro m in stitu tio n a l a rra n g e m e n ts and

th u s re su ltin g in the a n o m a ly o f risin g p rice s

b e h a v io ra l p ra ctice s that o p e ra te to m ake m an y

d esp ite sla ck e n in g d em a n d .

c o s ts

6




w ell

in to

and

p rices

r e la tiv e ly

u n r e s p o n siv e

to

THE IN F L A T IO N A R Y T R A N S M IS S IO N M E C H A N IS M

PRICE-ADJUSTMENT LAG

EXPECTATIONS LAG

________/\_______

,

T h e in f l a t i o n p r o c e s s is set in m o t io n b y a rise in a g g r e g a t e d e m a n d o r s p e n d i n g to a le v e l in e x c e s s o f the e c o n o m y 's lo n g - r u n c a p a c i t y to p r o d u c e .
B u s in e s s m e n in it ia lly r e s p o n d to the e x c e s s d e m a n d b y d r a w i n g d o w n in v e n t o r ie s a n d s t e p p i n g u p p r o d u c t io n .
O u t p u t e x p a n d s a n d th e d e m a n d f o r
re s o u r c e i n p u t s in c r e a s e s .
T h e re s u lt in g u p w a r d p r e s s u r e o n re s o u r c e p ric e s p u s h e s u p u n it p r o d u c t io n c o st s u p o n w h ic h p r o d u c t p r ic e s a r e b a s e d .
P ric e s t h e r e fo r e rise.
T h e se p ric e i n c r e a s e s in d u c e re s o u r c e o w n e r s to b a r g a i n f o r c o s t - o f - liv in g p a y in c r e a s e s to r e st o re re a l e a r n i n g s e r o d e d b y
in f la t io n .
T h is f e e d b a c k o f p r o d u c t p ric e s in to re s o u r c e c o st s g e n e r a t e s a d d i t i o n a l r o u n d s o f in f la t io n .
T h e p r ic e - a d j u s t m e n t l a g is the tim e it t a k e s
f o r d e m a n d p r e s s u r e to a f f e c t p r o d u c t p ric e s t h r o u g h the c o m p lic a t e d c h a n n e l o f f a c t o r c o sts.
If the in f la t io n p e rs is t s , it e v e n t u a ll y in d u c e s
re v i s i o n s o f e x p e c t e d f u t u r e r a t e s o f in fla t io n , w h ic h f e e d b a c k in t o w a g e s a n d p r ic e s to a d d f u r t h e r m o m e n t u m to in f la t io n .
S l o w to b u il d
h a r d to re v e rse , p ric e e x p e c t a t i o n s m a y k e e p w a g e s a n d p ric e s in c r e a s i n g l o n g a f t e r d e m a n d
a d j u s t m e n t o f th e e x p e c t e d f u t u r e ra t e o f in f la t io n to c h a n g e s in t h e a c t u a l c u r r e n t rate.

sh ort-ru n

sh ifts

in d e m a n d .2

F or

e x a m p le,

c y c le .

sla c k e n s .

T h e e x p e c t a t io n s l a g

u p w a rd
up and

a c c o u n ts fo r the slo w

W h e n in fla tion a cce le ra te s in the u p ­

lo n g -te rm co n tra cts fix so m e w a g e s and p rices
for su b sta n tia l in terv a ls o f tim e. In a d d ition ,

s w in g , th ese w a g e s are often s lo w to respon d.
In later sta g es o f a sharp in fla tio n , h ow e v e r,

reg u la ted

w a g e in crea ses m a y ou tstrip p rice increases.

rates

of

p u b lic

u tilities

can

be

ch a n g e d o n ly after le n g th y a d m in istra tiv e and

W a g e s m a y then ten d to rise ahead o f p rices to

ju d icia l p ro ce e d in g s . M o r e o v e r, th ere e x ist a
v a rie ty o f lega l re strictio n s on w a g e and p rice

r e sto re real e a rn in g s erod ed b y p ast p rice in ­
crea ses and to p r o te ct real ea rn in g s fro m an­

fle x ib ility , in clu d in g m in im u m w a g e la w s, rent
c o n tro ls , oil p rice ce ilin g s, in terest-ra te c e il­

ticip a te d fu tu re p rice in creases.

B u t the lag

b ecom es

in fla tion

in gs, and the like.

s u b s id in g as the rate o f w a g e in crea se sh ow s

T h e r e are a lso n u m e ro u s

g o v e r n m e n t-s a n c tio n e d

tra d e -re s trictio n

and

p r ic e -fix in g a rra n g e m e n ts, su ch as p r o d u c tio n

n o tice a b le

again

w hen

is

little te n d e n c y to d e ce lera te even th ou g h the

and m a rk e tin g q u ota s fo r certain a g ricu ltu ra l

rate o f rise o f o th e r p rices is d im in ish in g .
A n o t h e r im p o rta n t fa cto r c o n tr ib u tin g

p ro d u cts, im p ort q u o ta s, lic e n s in g and oth er

p rice r ig id ity is the p r ic e -s e ttin g b e h a v io r o f

restrictio n s to e n try o f p ro fe s sio n s, and resale

la rg e -s ca le firm s o p e r a tin g in m a n u fa ctu rin g

p rice m a in ten a n ce a g re e m e n ts.

in d u stries.

A ll th ese c o n ­

trib u te to the stick in e ss o f the p rices a ffe cte d .
A n im p orta n t fa cto r re ta rd in g p rice a d ju s t­
m en t is th e in fle x ib ility o f m a n y w a g e s. O w in g
to lo n g -te rm la b o r co n tra cts , d ela y s in the
a d ju stm e n t o f p rice e x p e cta tio n s , and p erh a ps
a lso w o r k e r s ’ m o n e y illu sion (i.e., fa ilu re to
d istin g u ish b etw e e n n om in a l and real w a g e in ­
c r e a s e s ), som e w a g e s ten d to la g b eh in d in fla ­
tion

d u rin g

certain

ph ases

of

the

b u sin ess




In the ty p ic a l im p e r fe c tly c o m p e ti­

tiv e m ark et, the p rice m e ch a n ism w o rk s in the
lo n g run as p rices a d ju st to clea r the m arket.
In the sh ort run, h o w e v e r, p rice s are rela tiv ely
in fle x ib le . F irm s d o n ot ty p ic a lly alter their
p rice s in re sp o n se to sh o rt-ru n sh ifts in d e ­
m and. A t least three e x p la n a tio n s o f this b e ­
h a v io r h a v e been o ffe re d .
A c c o r d in g to the first, firm s h a v e d ifficu lty
d is tin g u is h in g b e tw e e n real d e m a n d sh ifts sp e ­
c ific

2 Note that the rigidities or inflexibilities described in this sec­
tion refer not to lei’els of particular prices and costs but rather
to ra tes o f change of those variables. The concept of rigid price
levels, of course, implies the complete absence of price change
and is thus irrelevant to the analysis of inflation, which deals
with continually rising, not constant, prices.
The problem of
sluggish inflation is not the downward inflexibility of price
levels but rather the resistance of rates of price increase to
departures from the established trend.

to

to

a p a rticu la r

in d u stry

and

sh ifts

in

n om in a l a g g r e g a te d em a n d fo r the o u tp u t o f
all in d u stries.

B e ca u se

th e y

alter o n ly the

co m p o s itio n and n ot the o v e ra ll level o f a g g r e ­
g a te d em a n d , s p e c ific d em a n d sh ifts m ay o ccu r
w ith o u t in d u cin g a c o r r e s p o n d in g rise in input

7

p rices.

B y co n tra st, an e c o n o m y -w id e d em a n d

s o -ca lle d

unit

cost

or

m a rk -u p

p r ic in g

fo r ­

in crea se leads to an e q u ip r o p o r tio n a l b id d in g -

m ulas.

up o f in p u t p rice s. In the fo r m e r case, in d u stry

U n it-c o s t p r ic in g is th o u g h t lo b e c h a ra cte r­
istic o f m a n y o f the la rg e o lig o p o lis t ic firm s

co s t and su p p ly cu rv e s rem ain u n ch a n g e d .
the

latter

case,

h o w e v e r,

cost

an d

In

s u p p ly

that o p era te in A m e r ic a n in d u stry .

T h e m a rk ­

cu rv e s sh ift sh a rp ly u p w a rd , ju s t m a tc h in g the

up te ch n iq u e o f p r ic in g in v o lv e s se ttin g p rice s

rise in d em a n d .

T h e ra tion a l en trep ren eu ria l

on the basis o f a co n sta n t p e rce n ta g e m ark u p

rea ction to the fo rm e r is a c h a n g e in so m e
q u a n tity w h e re a s the ration al re a ctio n to the

a p p lied to p r o d u ctio n c o s ts p e r u nit o f o u tp u t
at so m e sta n d a rd lev el o f p la n t o p e ra tio n or

latter is a ch a n g e in p rices.

c a p a c ity u tiliza tion .

B ut w hen a g g re ­

g a te d em a n d alters th ere is a g o o d lik e lih o o d

T h e c h ie f c o s t c o m p o n ­

ents are unit la b o r and unit m aterials costs.

that each p r o d u ce r w ill ten d to re g a rd th e sh ift

In clu d e d

in d em an d fo r his p r o d u ct as sp e cia l to him

m a rg in per unit o f ou tp u t.

and so a d ju st q u a n tity rath er than p rice.

is u su a lly set to p r o v id e a fix e d ta rg et rate o f

O n ly

in the m ark u p is the fir m ’s p ro fit
T h is p r o fit m argin

later, w h en c o s t ch a n g e s b e c o m e w id e sp re a d ,

return 011 eq u ity .

w ill p ro d u c e r s c o r r e c tly p e rc e iv e the d em a n d

o r p r o fit m a rg in s are treated as fix e d con sta n ts

S in ce p e r c e n ta g e m ark u p s

sh ift as an e c o n o m y -w id e p h e n o m e n o n .

Then

in u n it-c o st p r ic in g fo rm u la s, it fo llo w s that

an d o n ly then w ill th ey start to ch a n g e th eir

fo rm u la -b a se d p rice ch a n g e s are s tr ictly co s t-

p rices.

d eterm in ed , that is, th e y

A s e co n d ex p la n a tion stresses the a d ­

m in istra tiv e in c o n v e n ie n c e and

c o s ts

o f fr e ­

q u en t p rice ch a n g e s— fo r ex a m p le , the e x p e n se
o f p rin tin g and d isse m in a tin g n e w p rice lists—
as a reason fo r stick y o lig o p o lis t ic p rices.
S till a th ird e x p la n a tio n o f p rice in fle x ib ility
in im p e rfe c tly c o m p e titiv e m a rk ets b e g in s w ith
the o b s e r v a tio n that in the c o m p le x and d y ­

resu lt s o le ly

fro m

c h a n g e s in u nit la b o r and m a teria l co sts. P rice s
re sp o n d to c o s ts, n o t to d em a n d .
M o re o v e r,
sin ce stan d ard u nit la b o r and m aterial co s ts are
r o u g h ly the sam e fo r all firm s in the in d u stry ,
u n it-c o s t fo rm u la s in su re th at p rice ch a n g e s
w ill be u n ifo rm th ro u g h o u t the in d u stry , th e re ­

is

b y m in im iz in g the risks o f c o m p e titiv e p rice
u n d e rcu ttin g .
T h u s u n it-c o s t p r ic in g is c o n ­

a lw a y s m u ch u n ce rta in ty a b o u t the e q u ilib ­
riu m o r m a rk e t-cle a rin g p rice. F irm s o p e r a t­

sisten t w ith th e s lo w re sp o n se o f p rice s to
sh ifts in d em a n d , the d e p e n d e n ce o f p rice s 011

in g in this kin d o f e n v iro n m e n t tr y to a v o id the

c o s ts, and the co o r d in a tio n o f p rice s in c o n ­
cen tra ted in d u stries.

n a m ic

m o d e rn

in d u stria l

econ om y

th ere

m ark et d isru p tio n , co n fu sio n , and p erh a p s even
o v e r t p rice w a rfa re that c o u ld resu lt if each
s o u g h t in d iv id u a lly to d ete rm in e the e q u ilib ­
riu m p rice. In o rd e r to p re v e n t su ch c o n fu s io n

A Source of Confusion

fro m d e v e lo p in g , firm s seek w a y s to co o r d in a te

The

p rice ch a n g e s. S u ch c o o rd in a tio n , if s u cce s sfu l,

p rice s to d em a n d p ressu re m ak es it d iffic u lt to
d istin g u ish ca u se fr o m e ffe c t in the in fla tio n ­

w ill assu re that firm s raise p rice s in u n ison

lo n g d e la y

in the a d ju stm e n t o f m an y

and that p rice ch a n g e s w ill n o t o c c u r w h e n

a ry s e q u e n ce and co n tr ib u te s to c o n fu s io n in

d em a n d sh ifts are th o u g h t to be te m p o r a r y

p o p u la r u n d e rs ta n d in g o f th e s o u rce o f in fla ­

and re v e rsib le .

tion.

F irm s h ave d e v ise d sev era l

T h e se q u e n ce o f c o s t-p r ic e re sp o n se o b ­

In ­

served in co n ce n tr a te d in d u stries, fo r ex a m p le,

fre q u e n t p rice ch a n g e s are p erh a p s the s im ­

m a y su g g e s t th at in fla tio n is in itia ted b y a u ­

te ch n iq u e s to fa cilita te p rice c o o r d in a tio n .
p le st o f these.

P r ic e lea d ersh ip

co n s titu te s

to n o m o u s in crea ses in co sts.

T h e use in su ch

In this case, o n e firm

in d u stries o f m a rk -u p or u n it-c o s t p r ic in g fo r ­

— o fte n th e la rg e st in the in d u s try — in itiates

m u las, and the re su ltin g d e p e n d e n ce o f p rices

p rice ch a n g e s, and the rest m o re or less a u to ­

011 co sts, m ean s that firm s d o n o t raise p rices

a n oth er su ch te ch n iq u e .

P e rh a p s

u nless th ere o cc u r s a p rio r in crea se in costs.

the m o st w id e ly u sed m e ch a n ism fo r c o o r d i­

T h is c o s t-p r ic e se q u e n ce , w ith c o s ts risin g first

n a tin g

b a se

and p rices later, m akes it a p p ea r that in fla tion

s e llin g p rice s on u nit la b o r and m a teria l c o sts

is c a u se d b y risin g co s ts w h e n in fa ct ex ce ss

that are th e sam e fo r all firm s in the in d u stry .

d em a n d is u su a lly the cu lp rit.

T h is p ra c tice is a c c o m p lis h e d b y the u se o f

out

m a tica lly fo llo w that p rice ch a n g e .

8




p rice

b e h a v io r,

h ow ever,

is

to

earlier, b o th

the c o s t

F o r, as p oin ted

in crea se

and

the

a b ility o f firm s to pass on th is in crea se are
A
to 2 , p r io r ^v p3.nsiors in
rictTicinci

tio n p o lic y .

Ju st as in an u p w a rd p rice spiral

fo r fin a l g o o d s and se rv ices.

s tic k y a d m in iste re d p rices reta rd tlic su ieu d ui
in fla tio n , so w h en the spiral is u n w in d in g th ey

S im ila rly , the lo n g la g in the re sp o n se o f
o lig o p o lis t ic p rice s to p rio r in fla tio n a ry p r e s ­

to p r ic e sta b ility .

su res m a y m ake it ap p ear that la rg e firm s in
co n c e n tra te d in d u stries p la y an im p o rta n t in ­
d e p e n d e n t role in g e n e r a tin g in fla tio n . D u e to
th e

p rice -a d ju s tm e n t

crea ses in su ch

lag, c a tc h -u p

p rice

in d u stries are o fte n

in ­

d e la y e d

d e la y its d e ce le ra tio n and im p e d e the return

The Expectations-Formation Lag
A s n o te d ea rlier, the c o m p lic a tin g e ffe c ts o f
th e

s o -ca lle d

p r ic e -a d ju s tm e n t

la g

are

re in ­

until w e ll after re strictiv e p o lic ie s start to
turn th e in fla tio n p ro ce ss a rou n d .
T he ap­

fo r c e d b y a co m p a r a b le la g in p rice e x p e c ta ­
tio n s, w h ich ten d to a d ju st s lo w ly to the a ctu al

p a ren t p e rv e rse b e h a v io r o f p rice s w h e n m a r­

rate o f in fla tio n .

k ets

la g o c c u r and w h a t d eterm in es its le n g th ?

are

sla ck

and

u n e m p lo y m e n t

is

risin g

W h y d oes this e x p e cta tio n s

fo s te rs the n otio n o f g ia n t firm s a rb itra rily
e x e r c is in g m o n o p o ly p o w e r b y e ffe c tin g a u to n ­

T h e e x p e c ta tio n s la g o cc u r s b e ca u se p e o p le
h a v e im p e rfe c t fo r e s ig h t and c a n n o t p re d ict

o m o u s in crea ses in p rice s to ta lly in d e p e n d e n t
o f e c o n o m ic co n d itio n s .3 B u t it sh o u ld b e n o te d

th e fu tu re w ith ce rta in ty .

that th e p rice in crea ses in su ch situ a tio n s can
be in terp reted as co n s titu tin g a d e la y e d re­
a ctio n to p rior e c o n o m ic c o n d itio n s o f e x p a n d ­

n o fo r e c a s t in g errors and n o e x p e cta tio n s lag.

in g d em a n d and d e m a n d -in d u ce d c o s t in crea ses
and a n ear p e rfe c t e x a m p le o f th e p r ic e -a d ju s tm en t lag. T h e y m ig h t w e ll b e in te rp re te d as a
d e la y e d m a n ifesta tio n o f the e ffe c ts o f a g e n ­

I f the fu tu re w e re

k n o w n w ith a b s o lu te ce rta in ty , th ere w o u ld be
A n tic ip a tio n s w o u ld adapt th e m se lv e s in sta n ­
ta n e o u s ly to rea lized o u tco m e s , and the e x ­
p e c te d rate o f in fla tio n w o u ld a lw a y s be the
o n e that a ctu a lly o ccu rre d . A lth o u g h th e fu ­
tu re is e m p h a tica lly u n certa in , p e o p le n e v e r ­
th eless try to m ak e in fo rm e d g u e sse s a b o u t it,

eral in fla tio n rath er than o f in fla tio n -in itia tin g

o fte n

p rice b eh a v ior.
F r o m this in terp reta tion it fo llo w s that b ig

T h u s on e lo n g s ta n d in g e x p la n a tio n o f the la g

firm s are n ot in fla tion starters.

c e iv e d

N e v e rth e le ss

th e y m a y p la y an im p o rta n t ro le in the w o r k ­
in g o u t o f the in fla tio n a ry p ro ce ss . S p e c ifica lly ,
th e y m a y be in fla tio n p r o lo n g e r s .

It fo llo w s

lo g ic a lly fro m the m ere e x iste n ce o f the p rice a d ju s tm e n t la g that a d m in istered p rice s d o n ot
u su a lly in itiate in fla tion .
s lo w it d o w n .

In ste a d th e y ten d to

B y d o in g so, h o w e v e r , th e y e x ­

on

the ba sis o f a n a ly ses o f the past.

h o ld s that p rice p re d ictio n s are b a sed on p e r­
tren d s

as

e stim a ted

fro m

p ast

p rice

e x p e r ie n c e p erh a p s m o d ifie d b y cu rre n t in fo r ­
m a tion .
B e ca u se th e y re fle ct the p ast, th ese tren d s
and the p r e d ic tio n s d e riv ed fro m th em ch a n g e
s lo w ly o v e r tim e. T r a n s ito r y d e v ia tio n s fro m
the tren d h a v e little im p a ct on e x p e cta tio n s .
T h u s if the cu rre n t rate o f in fla tio n dep arts

ten d the d u ra tion o f in fla tion and p r o tra ct the
p e rio d n e ce ssa ry fo r its rev ersa l. A d m in is te r e d
p rice s are a p ro b le m b e ca u se th e y act to p r o ­

fr o m the re ce n t tren d , the e x p e c te d rate w ill
rem ain u n ch a n g e d fo r a tim e. It req u ires the

lo n g in fla tio n o n ce it g e ts sta rted and b e ca u se
th e y d e la y the su cce ss and e x a ce rb a te the a d ­

at least a v e r y la rg e ch a n g e , in the a ctu al rate
to p r o d u c e a c h a n g e in the e x p e c te d rate. A n d
ev en then the a d ju stm en t w ill n ot b e in sta n ta ­
n e o u s o r c o m p le te .
T h e e x p e c te d rate w ill

v e rse sid e e ffe cts o f a n ti-in fla tio n a ry s ta b iliz a ­

3 This simplistic cost-push view is implausible and at odds with
the orthodox theory of monopoly behavior.
According to the
latter view, a monopolist sets a relative price for his product
that maximizes profits in real terms and maintains that real
price by adjusting his nominal price to allow for inflation. The
logical implication is that given the degree of monopoly power
monopolists would have no incentive to raise prices other than to
keep pace or catch up with inflation. W ith real prices already
established at profit-maximizing levels, any further upward
adjustment would reduce profits. On the other hand, if prices
are being raised to exploit hitherto unexploited monopoly po­
tential, the question arises as to why those gains were foregone
in the past.
In either case, rising real prices imply nonrational behavior.
It is true that rising real prices would be
consistent with profit-maximizing behavior if the degree of
monopoly power were increasing. But there is little empirical
evidence that monopoly power is on the rise.




c u m u la tiv e in flu e n ce o f a su sta in ed ch a n g e , or

co n tin u e to la g b eh in d th e cu rre n t rate.
As
tim e pa sses, h o w e v e r , and th e n e w rate p e r­
sists, it w ill e v e n tu a lly b e g in to d om in a te the
tren d. T h e p rice e x p e rie n ce o f the m ore distant
past g ra d u a lly w ill b e fo r g o tte n and the e x ­
p e cte d rate w ill fin a lly c o n v e r g e on the actu al
rate.
T h e le n g th o f tim e req u ired fo r this c o n ­
v e r g e n c e ca n n o t be s p e cifie d w ith an y d e g re e

9

o f p re cis io n .

It d e p e n d s on w h a t in terv a l or

a n a ly sts h ave a d v o ca te d the a b a n d o n m e n t o f

in terv a ls o f the past p e o p le c o n s id e r in fo r m u ­

d is cr e tio n a r y p o lic y in fa v o r o f fix e d p o lic y

latin g- th eir e x p e cta tio n s and, in p a rticu la r, on

rules.

w h a t rela tiv e w e ig h t th e y a ssign to the p rice

the la g s are n ot so v a ria b le and u n p re d icta b le

e x p e rie n ce o f the m o re d ista n t p ast.

as to d efea t e ffe c tiv e p o lic y

In g e n ­

eral, the g re a te r the w e ig h t a ss ig n e d to the
d ista n t past, the lo n g e r w ill b e the lag.

The

O th e r o b se rv e r s, h o w e v e r , a rg u e that

c o n tr o l.

fo r e c a s tin g and

A c tu a lly , little is k n o w n a b o u t the

v a r ia b ility o f the la gs.

T h e e v id e n c e is sim p ly

la g m a y in deed b e q u ite lo n g b e c a u se p e o p le ,

n o t su ffic ie n t to settle the issu es.

in fo rm u la tin g th eir e x p e c ta tio n s , m a y

ru les w o u ld be su p e rior to d is c r e tio n in th e

n ot m ere ly at a c h r o n o lo g ic a l

look

su c c e s sio n

of

p rio r yea rs b u t rath er at the re le v a n t phases
of

a

s u cce ss io n

of

past

W h e th e r

c o n d u c t o f sta b iliza tio n p o lic y rem a in s an op en
q u e stio n .

in fla tio n -r e ce s sio n

A d d itio n a l p o lic y p r o b le m s a rise fro m

the

c y c le s and at the p u b lic p o lic y re sp o n se to
th ese ep isod es. L o o k in g b a ck at a su cce ssio n

length rath er than the v a r ia b ility and u n p re ­

o f w h a t m ig h t be re g a rd e d as s t o p -g o p o licie s ,

tio n e d , the p rice -a d ju s tm e n t a n d e x p e cta tio n s

d ic ta b ility o f the lags.

A s p r e v io u s ly

e x te n d the tim e it takes

fo r

m en­

fo r ex a m p le , p e o p le m a y e x p e c t th e re ce ssio n

la g s

p h ase to be b r ie f and to b e fo llo w e d im m e d i­

in d u ce d ch a n g e in sp e n d in g to w o r k its w a y

a p o lic y -

a tely b y an e x p a n sio n a ry p h a se that e x p e rie n ce

th ro u g h to the rate o f in fla tio n .

su g g e sts m a y b r in g n e w in fla tio n a ry p ressu res.

th e y in flu e n ce the pattern o f re sp o n s e o f q u a n ­

M o re o v e r,

T o u se a p o p u la r e x p re s sio n , th e y m a y “ look

tities and p rice s to in fla tio n a ry stim u li.

a cro ss the v a lle y .”

c ific a lly , th ey ca u se the q u a n tity re sp o n se to

A seco n d fa c to r that m a y a ffe c t the len gth o f
the e x p e c ta tio n s la g is the variability o f the
rate o f in fla tion a b o u t th e tren d.

T h e g re a te r

the v a ria b ility o f the actu al rate o f in fla tio n the

p re c e d e th e p rice resp on se.

sp e n d in g

ch a n g e s, o u tp u t and e m p lo y m e n t a d ju st first,
p rice s o n ly later.

W h a t a rc th e p o lic y im p li­

ca tio n s o f such c o n s e q u e n c e s ?
F irst, o w in g to the s lo w re s p o n se o f in fla ­

g re a te r is the fin a n cia l in c e n tiv e to fo r e c a s t it
m ore a ccu ra te ly , i.e., to p re d ict th e v a ria tion s,
n o t ju s t the trend. A c c o r d in g ly , fo r e c a s ts o f

W hen

Spe­

tion

to

a sp e n d in g ch a n g e ,

a n ti-in fla tio n a ry

fr e ­

m o n e ta ry -fisc a l p o lic y can be e x p e c te d to p r o ­
d u ce o b s e rv e d resu lts o n ly a fter a c o r r e s p o n d ­

q u e n tly and w ill re ly m o re h e a v ily on cu rren t

in g lag. Q u ic k m o n e ta ry r e m e d ie s fo r in flation

and recen t in fo rm a tio n . T h e w h o le tim e fram e
e m p lo y e d in o b s e r v in g p a st p r ice b e h a v io r and

are n o t lik ely to be fou n d .

the in fla tio n

rate w ill be re v ise d

m o re

M o r e o v e r , sin ce

the initial im p a ct o f a c h a n g e in s p e n d in g is

p a st fo r e c a s tin g e rro rs w ill c o n tr a c t and sh ift

on

to w a rd th e presen t.

p rice s , a m o v e to m o n e ta ry restra in t w o u ld

C o r r e s p o n d in g ly , the e x ­

o u tp u t

and

e m p lo y m e n t

ra th er

than

011

a lm o st su re ly entail a re ce ssio n o r at least a

p ecta tio n s la g w ill b e sh orter.

m a rk ed re ta rd a tion in the rate o f e x p a n sio n o f
the e c o n o m y .

Time Lags and
Demand Management Policies

In sh ort, a te m p o r a r y b u t p r o ­

tra cted p e rio d o f u n e m p lo y m e n t, id le ca p a city ,
an d s lu g g is h g r o w th m ig h t h a v e to be en d u red

T h is article has fo c u s e d 011 th e ro le o f tim e

if r e s tr ictiv e p o lic y w e re to b e s u c ce s s fu l in

lags in th e in fla tio n a r y tra n sm ission

p e rm a n e n tly lo w e r in g the rate o f in fla tion .

m e ch a ­

T h e s e lags raise se v e ra l p o te n tia l p r o b ­

S e co n d , du e to th e d iffe re n c e in tim in g o f the

lem s fo r d em a n d m a n a g e m e n t, i.e., m o n e ta ry

re sp o n s e o f o u tp u t and p rice s to a sp e n d in g

and fisca l, p o lic y . F irst, if the la g s are v a ria b le

ch a n g e ,

and hard to p re d ict, p o lic y m a k e r s m a y e x p e r i­

im p o te n t o r even p e rv erse.

nism .

a n ti-in fla tio n a ry

m o v e m e n ts

ten d

to

p o lic y

m ay

ap p ear

B e ca u s e in fla tio n ­

en ce d iffic u lt y in a c c u r a te ly fo r e c a s tin g w h en

a ry

their p o lic y a ctio n s w ill take e ffe c t on the rate
o f in fla tion . In this ca se d is c r e tio n a r y p o lic y ­

p rice s m a y c o n tin u e to rise lo n g a fter o u tp u t

su b sid e

so

s lo w ly ,

and e m p lo y m e n t h a v e tu rn ed d o w n .

m a k in g b e c o m e s a p o te n tia lly risk y u n d erta k ­

fla tion

T h u s in ­

can p ersist even in sla ck m ark ets, a

ing. T h a t is, u n p re d icta b ility o f the la g e ffe cts

c o n d itio n v a r io u s ly k n o w n as in fla tio n a ry re ­

o f p o lic y m a y ren d er the latter d e sta b iliz in g
rath er than sta b iliz in g . F o r this rea son , so m e

c e s sio n , sta g fla tio n , or slu m p fla tio n .

10




su ch

p e rio d s,

m o n e ta ry

restra in t

D u r in g
m ay

be

w r o n g ly b la m e d fo r c a u s in g b o th th e slu m p

p e g g e d in the fa ce o f p e rsiste n t e x ce ss dem and.
T ,- ,

t , -------------________________________ . i _

t .

W.U lliC dLLOIiipaii;
4 U
lJlu“
tim es, m o n e ta ry a u th orities, a n x iou s to a ch ie v e

g ra v ita te to an e q u ilib riu m level w h ere e x cess

q u ick and re la tiv e ly p a in less resu its, m a y be
te m p te d to ab a n d on the p o lic y o f restra in t as

ju stm e n t to that le v e l b u t th ey ca n n o t stop it.

in e ffe c tiv e at b e st and h a rm fu l at w o rs t.

T h e e q u ilib riu m rate o f in fla tion w ill in e v ita ­

O H rl

tVl A

n /'r 'A m

n o m

n n

rv

in - fl o fi a m

A +
■

C IIO ^

± ll

ia v i,

i i U W t V li ,

d em a n d is ze ro .

LilC

lcllt

Ul

l i i i l ei L I U l i

ICllU^

LU

C o n tr o ls can d e la y the ad ­

T h ird , th e sam e a sy m m e trica l p a ttern o f re­

b ly be re a ch e d either v ia e v a sion , i.e., th ro u g h

sp o n se — o u tp u t first, p rice s o n ly m u ch later—
m a y crea te th e d a n g e ro u s illu sion th at e x p a n ­

b la ck m a rk ets, or a fter the c o n tr o ls are lifted.

s iv e p o lic y in th e u p s w in g can a ch ie v e p e r m a ­

e ffe c t

n en t g a in s in o u tp u t and e m p lo y m e n t at the

w h ich is d e te rm in e d b y a g g re g a te dem an d.

c o s t o f little a d d itio n a l in fla tion . I f in fla tion
p ro ce e d s as d e scrib e d in the fo r e g o in g se ctio n s ,

lo g ic a lly fo llo w s , th e re fo re , that a d ecrea se in
a g g r e g a te d em a n d , n o t the a p p lica tio n o f c o n ­

this v ie w m a y h ave u n fo rtu n a te c o n s e q u e n ce s .

trols, is the sin e q u a n o n fo r the red u ction o f
the in fla tion rate.

F o r it is v irtu a lly im p o ss ib le to p e g o u tp u t and
e m p lo y m e n t a b o v e th eir n atural or e q u ilib riu m

In the fin al a n a ly sis, c o n tr o ls
on

the

e q u ilib riu m

w ill have n o

rate

of

in flation ,

lev e ls w ith o u t c o n tin u o u s ly a c ce le ra tin g the
rate o f in fla tion . In a n y case, tim e la g s m ay

Controls and the Expectations Lag

w ell c o m p o u n d the p ro b le m o f c u r b in g in fla ­

A

It

m ore so p h istica te d

a rg u m e n t fo r c o n tro ls

tion b y le a d in g to th e u n du e p ro lo n g a tio n o f

ca lls fo r u s in g th em as a su p p le m e n t to m o n e ­

e x p a n siv e p o lic y , th u s in cre a s in g the m o m e n ­

ta ry and fisca l p o licy .

tu m b eh in d in fla tio n w h e n it fin a lly o ccu rs.

calls

T o su m m a rize , g iv e n s o c ie t y ’s c o m m itm e n t
to fu ll e m p lo y m e n t, the e x iste n ce o f tim e lags
in th e in fla tio n a r y m e ch a n ism m a y b e s u ffi­
cien t to b ia s m o n e ta r y -fisc a l p o lic y towrard in ­
fla tion o v e r th e en tire p o lic y c y c le .

T h e lags

ca u se o u tp u t and e m p lo y m e n t to a d ju st b e fo r e
p rices.
C o n se q u e n tly , th e d esired o u tp u t re­
su lts o f stim u la tiv e p o lic y w ill o c c u r b e fo re
th e

u n p leasa n t

in fla tio n a ry

resu lts.

In

the

ca se o f re strictiv e p o lic y , h o w e v e r, th e u n d e ­
sira ble u n e m p lo y m e n t e ffe cts w ill p re ce d e the
d esire d

p rice

sta b iliz a tio n .

G iv en

th e

fu ll-

e m p lo y m e n t co m m itm e n t, the e x iste n ce o f an
in ce n tiv e to em p h a size stim u la tiv e p o lic y and
to s o ft-p e d a l c o n tr a c tio n a r y p o lic y is u n d e r­

fo r

first

T h e p re scrip tio n here

e m p lo y in g

a

m o n e ta ry -fisca l

p o lic y s u ffic ie n t to elim in a te e x ce ss a g g re g a te
d em a n d and then u s in g c o n tr o ls to speed the
a ctu al rate o f in fla tio n to its n ew eq u ilib riu m
level. In this v ie w , a c o n tr o ls p ro g ra m p r o p ­
erly co o r d in a te d w ith re s trictiv e d em a n d p o lic y
co u ld help sh o r t-c ir c u it th e p a in fu l p ro ce ss o f
w in d in g -d o w n a stu b b o rn in fla tion .
T h e fo r e g o in g a rg u m e n t rests on the b e lief
that c o n tr o ls can e x e rt an in d ep en d en t in flu ­
en ce on o th e r w is e s tic k y p rice ex p e cta tio n s.
E r a d ic a tio n o f in fla tio n a ry e x p e cta tio n s is o f
co u rse a p re re q u isite to the e lim in a tion o f in ­
fla tion , sin ce the fo r m e r is a d e term in a n t o f
the latter.
e x p e cta tio n s .

T h e p r o b le m
The

is h o w to dam pen

orth o d o x

m e th o d

is

to

crea te sla ck (e x c e s s s u p p ly ) in the e co n o m y ,
thus ca u s in g the a ctu a l rate o f in fla tion to fall

stan d a ble.

b e lo w the e x p e c te d rate, in d u c in g a d o w n w a rd

Direct Controls

re v isio n o f the latter.

I f o r th o d o x d em a n d -m a n a g e m e n t p o lic ie s c a n ­
n ot cu rb in fla tio n w ith o u t c a u sin g p a in fu l rises

tion s lag, h o w e v e r, th is a d ju stm e n t m ay be a
s lo w p ro c e s s and a p rim e e x a m p le o f h o w s lu g ­

in u n e m p lo y m e n t, th en w h a t o th e r m ea n s can
b e u tiliz e d ?
O n e s u g g e s tio n is to re im p o se

g ish p rice a n ticip a tio n s can im p e d e the return

d irect w a g e -p r ic e co n tro ls. S everal a rg u m en ts
h av e been a d v a n ce d on b e h a lf o f co n tr o ls. T h e

as a m ean s o f s p e e d in g the e x p e c ta tio n s a d ju st­

m o st n a iv e is that c o n tr o ls can co n stra in the
rate o f in fla tion w h ile the a u th orities p u rsu e
d e m a n d -e x p a n sio n p o licie s n e ce ssa ry to in su re
fu ll e m p lo y m e n t.
the

rate

of




T h is a rg u m e n t a ssu m es that

in fla tio n

can

be

p e rm a n e n tly

to p rice sta b ility .

O w in g to the e x p e cta ­

D ir e c t co n tr o ls are v ie w e d

m en t and th u s r e d u c in g the d u ra tion and
se v e rity o f the e c o n o m ic s lo w d o w n n ecessa ry
to b r in g in fla tio n to its e q u ilib riu m lev el d e te r­
m ined b y a g g r e g a te d em a n d .
H o w c o u ld c o n tro ls in flu e n ce e x p e cta tio n s ?
T w o m e ch a n ism s h ave b een su g g e ste d .

F irst,
11

th e m ere a n n o u n ce m e n t o f c o n tr o ls m ig h t alter

le g itim a te c a tch -u p an d u n w a rra n te d a n ticip a ­

e x p e cta tio n s in th e d e sired d ire ctio n .

to r y p rice in crea ses.

by

S e co n d ,

fr e e z in g p rice s o r at least se v e re ly

stra in in g

th eir

rate o f

rise,

c o n tr o ls

con ­

w o u ld

ca u se the g a p b e tw e e n th e e x p e cte d an d actu a l
rates o f in fla tio n to b e g re a te r than it w o u ld

In p r a ctice , h o w e v e r, the

tw o are v ir tu a lly in d is tin g u ish a b le , and c o n ­
tro ls p ro h ib it b o th .

B y fo r c in g th e p o s tp o n e ­

m en t o f c a tch -u p p rice in crea ses, c o n tr o ls p r o b ­
a b ly p r o tr a c t the in fla tio n a r y p r o c e s s and

o th e rw is e b e. A s s u m in g th at th e rate at w h ich

len g th en the in terv a l re q u ire d fo r th e rate o f

e x p e cta tio n s are re v ise d v a ries d ir e c tly w ith

in fla tio n to rea ch its e q u ilib riu m lev el.

the size o f th e g a p , c o n tr o ls w o u ld th u s a c ­
celera te the d o w n w a r d re v isio n o f e x p e c ta ­

in terim , the c o n tr o ls -d is to r te d p rice stru ctu re

tion s.

g e n e ra te s in e ffic ie n c y , re so u rc e m isa llo ca tio n ,
and in co m e r e d istrib u tio n .

T h is v ie w , h o w e v e r, p r o b a b ly o v e re s tim a te s
the in flu e n ce o f co n tr o ls.

T o h ave a n y th in g

m o re than a te m p o ra ry im p a ct on p rice e x p e c ­

In the

C le a rly , in the c o n ­

te x t o f the e x p la n a tio n p re se n te d h ere, co n tro ls
o ffe r n o so lu tio n to th e p r o b le m o f stick y in ­
fla tion .

ta tion s, the c o n tr o ls m u st c o n v in c e th e p u b lic
that the tren d o f p rice s w h e n c o n tr o ls are in
fo r c e is a re lia b le in d ica to r o f the lik e ly fu tu re

Other Proposed Solutions

tren d o f p rice s a fte r th e y are lifted . T h e p u b lic

O n e o f the m o re p ro m is in g , and y e t u n tried,

m a y be hard to co n v in ce , e s p e c ia lly if th e c o n ­

so lu tio n s to the la g p r o b le m is in d e x a tion , i.e.,

trols h av e fa ile d to s to p in fla tio n in th e past.

th e in clu sio n o f p u r c h a s in g p o w e r cla u ses in

A s id e fro m th is p o in t, it is hard to u n d ersta n d

all co n tra cts.

w h y c o n tr o ls sh o u ld h a v e a str o n g e r im p a ct on

to a u tom a tic c o s t o f liv in g e sca la to rs, in fla tion

e x p e cta tio n s th an , say, an a n n o u n ce d p o lic y o f
a p erm a n en t re d u ctio n in th e g r o w th rate o f

th ro u g h o u t

the m o n e y

fa ster re sto ra tio n o f re la tiv e p rice e q u ilib riu m .

sto ck .

W h a t co u n ts

is n o t the

m ean s b y w h ic h the g o v e r n m e n t a n n o u n ce s its
d eterm in a tio n to p e rm a n e n tly re d u ce in fla tio n
b u t that th o se in te n tio n s b e b e lie v e d .

W it h all co n tra ctu a l p rice s tied

w o u ld be tra n sm itte d m o re q u ic k ly and e v e n ly
all

m a rk ets,

th e r e b y

p e rm ittin g

O n the d o w n s id e , in d e x a tio n co u ld h elp red u ce
e x p e cta tio n s m o re q u ic k ly , th u s s h o r te n in g the
tim e req u ired to r e m o v e in fla tio n .
C ritics
a rg u e that in d e x a tio n w o u ld in te n s ify in flation .
T h is criticis m co n fu s e s the le v e l o f in fla tion

Controls and the Price-Adjustment Lag

w ith

It sh ou ld b e n o te d , m o re o v e r , that ev en if c o n ­

p u lses are p r o p a g a te d th ro u g h th e e co n o m y .

the sp e e d w ith

w h ic h

in fla tio n a ry

im ­

trols c o u ld re d u ce the e x p e c ta tio n s lag, th ey

T h e r e is n o rea son to b e lie v e th at esca la tor

w o u ld ten d to len g th en the p rice -a d ju s tm e n t

cla u ses b y th e m se lv e s w o u ld h a v e a n y e ffe ct
on the rate o f in fla tio n . T h e sp eed o f in flation

lag, and this w o u ld im p e d e the retu rn to e q u i­
libriu m .

T h e a tta in m en t o f e c o n o m ic e q u ilib ­

riu m req u ires that tw o c o n d itio n s b e sa tisfied .

w o u ld be in crea sed , to b e sure, b u t the level
o f in fla tion w o u ld n o t n e c e s sa r ily be an y

F irst, in fla tio n m u st b e c o r r e c tly a n ticip a te d ,

h ig h er.

A n o t h e r p a rtia l so lu tio n to the lag

i.e., the e x p e c te d rate o f in fla tion m u st equ al

p r o b le m

w o u ld

the actu al rate.

co n tra cts.

S e co n d , th e eq u ilib riu m s tr u c ­

be to sh o rte n

the len g th

of

F o r e x a m p le , tra d e -u n io n c o lle c tiv e

Lag­

b a rg a in in g a g re e m e n ts c o u ld be r e n eg otia ted

g in g p rice s and c o s ts m u st b e a llo w e d to ca tch

m o re fr e q u e n tly as c o u ld lo n g -te rm co n tra cts

up to and reesta b lish th eir e q u ilib riu m

fo r ra w m a teria ls and e n e rg y su p p lies.

ture o f re la tiv e p rice s m u st be restored .

re la ­

tion sh ip s w ith o th e r p rice s that h ave a lre a d y
a d ju sted to in fla tio n .
ca tch -u p

p rocess

p rice s and c o sts.
m en ts

by

C o n tro ls in te rru p t this
a rb itra rily

fr e e z in g

all

A s a resu lt, ca tch -u p a d ju s t­

are p o s tp o n e d

u n til

the

co n tr o ls

A d istin ctio n sh ou ld b e m ad e h ere b etw een
r e fo rm s d e sig n e d to in cre a se the sp eed o f re ­
sp o n se o f in fla tio n

to ch a n g e s

in a g g re g a te

d em a n d and re fo rm s a im ed at re d u cin g the

are

eq u ilib riu m rate o f u n e m p lo y m e n t, i.e., the u n ­

lifted and a c c o u n t fo r the o b s e r v e d te n d e n c y

e m p lo y m e n t rate that, g iv e n the in ev ita b le
frictio n s , rig id itie s and im p e r fe c tio n s in the

fo r p rices to rise sh a rp ly w h en c o n tr o ls are
term in ated .
arise

if

12




N o te that this p ro b le m w o u ld n ot

c o n tr o ls

c o u ld

d istin g u ish

b e tw e e n

e co n o m y , is ju s t c o n sis te n t w ith z e r o ex ce ss
d em a n d and sta b le (n o n a c c e le r a tin g , n o n d e c e l­

e ra tin g ) rates o f in fla tio n .
■f Vi o

-f’ O f t ' n O f

f nnr^rTr

1 11
VV^iiC

t ■ r -i
*

re fo rm s fa ll in the latter.

fo llo w s th at a n y p o lic y that re d u ce s th e latter

In d e x a tio n falls in
o

o

f

f

Ov vt*wv.U

1 r »f 1 f o 1
1 1

n 1 p /—
v

HiOO

refer to m ic r o e c o n o m ic p o lic ie s d ire cte d at im ­
p r o v in g the e ffic ie n c y

v.u litv . 0

1

1 /-*-»•■/-» 1

/->

1 ——
-

Lii\_ Li a i io i LiU iiai i l v t i W U iltiilJJIU y "
X

m ent.

S tru ctu ra l re fo rm s

1 he p o lic y im p lica tio n s s te m m in g trom the
p r e c e d in g a n a ly sis are s tr a ig h tfo rw a rd .

o f la b o r and p ro d u ct

R e ly

m ark ets. T ru e , th ese p o lic ie s m a y in crea se the
re sp o n siv e n e ss o f in fla tio n b y e ra d ica tin g m a r­

on d e m a n d m a n a g e m e n t p o licie s to b r in g in ­

k et im p e rfe ctio n s that in h ib it p rice fle x ib ility .

E s c h e w co n tr o ls .

B u t th eir c h ie f p u r p o se is to re d u ce the e q u i­
lib riu m rate o f u n e m p lo y m e n t at w h ich the

in in fla tio n n e ce ssita te s a te m p o r a r y rise in
u n e m p lo y m e n t a b o v e its e q u ilib riu m lev el w ith

d em a n d fo r and s u p p ly o f la b o r are in b a la n ce
and at w h ich a n y sta b le rate o f in fla tio n (in ­

the a m o u n t o f the rise d e p e n d in g on the speed
w ith w h ic h in fla tio n is to be re m o v e d . C h o o se

c lu d in g a z e ro ra te ) is p o s sib le .

stru ctu ra l p o licie s m a y m ake it ea sier in at

th e d e sire d path to p rice sta b ility a lw a y s rea l­
iz in g th a t the fa ster the path the h ig h e r m u st

least t w o w a y s to b r in g in fla tio n u n d er co n tro l.

b e th e le v e l o f u n e m p lo y m e n t in th e in terim .

F irst, th e y m ay ren d er the e q u ilib riu m rate o f
u n e m p lo y m e n t and the c o r r e s p o n d in g z e ro or

A c k n o w le d g e a lso that th e e x te n t and du ration
o f th e s lo w d o w n d ep en d s on th e sp eed w ith
w h ic h in fla tio n re sp o n d s to e x c e ss su p p ly and

fla tio n d o w n to the d esired ste a d y -sta te level

B y so d o in g ,

o th e r d esired ste a d y rate o f in fla tio n a m ore
a cce p ta b le p o lic y o p tio n .

R e c o g n iz e that a s lo w d o w n

e x p e c ta tio n s o f fu tu re p rice ch a n g e s are
a d a p ted to in fla tio n a ry e x p e rie n ce .
U se in ­

B y b r in g in g e q u ilib ­

riu m u n e m p lo y m e n t d o w n to a so c ia lly to le r ­

d e x a tio n , if p o ss ib le , to in crea se this sp eed o f
re sp o n se . O n c e in fla tion is re m o v e d , m aintain

a b le lev el, stru ctu ra l p o lic ie s re d u ce the risk
that p o litica l p ressu re w ill be p u t on the a u ­
th orities to p e g u n e m p lo y m e n t at even lo w e r

p rice sta b ility b y a v o id in g e x p a n sio n a r y p o li­
cies th at g e n e ra te e x ce ss d em a n d . I f s o c ie ty is

lev els that can o n ly b e m a in ta in ed b y a c o n ­
sta n tly a cce le ra tin g rate o f in fla tio n . S e co n d ,

u n w illin g to to le ra te

the e q u ilib riu m

unem ­

th e y red u ce the se v e r ity o f the re ce ssio n n e c e s ­

p lo y m e n t rate a sso cia te d w ith p rice sta b ility ,

sary to a ch ie v e p rice sta b ility .

d e sig n stru ctu ra l re fo rm s to lo w e r the e q u ilib ­
riu m rate. Tf s o c ie ty is still u n w illin g to a cce p t

S in ce a d a m p ­

e n in g o f in flation re q u ire s a te m p o r a r y rise in
u n e m p lo y m e n t a b o v e its e q u ilib riu m level, it

that rate, p rice sta b ility is im p o s sib le .

AP P E N D IX:

in fla tio n .

The Treatment of Lags in Simple
Analytical Models of the Inflationary
Transmission Mechanism

th e p a tte r n o f th e ir in te r a c tio n




T h e y a ls o s p e c ify the lag s

lin k in g th e v a ria b le s a n d d e te r m in in g
tim e .

price-adjustment equation a n d an expectations-form ation equation.2 T h e
p ric e - a d ju s tm e n t

c o n s titu e n t
in

th e

lag s

fo r m

m o d e ls .1

ca n

of

be

s u m m a r iz e d

s im p le

a n a ly tic a l

e q u a tio n

e x p la in s

h o w th e c u rre n t ra te o f in fla tio n re­
sponds

T h e in fla tio n a r y m e c h a n is m a n d its

over

C o m p r is in g the se m o d e ls are a

to

in fla tio n a r y

e x p e c ta tio n s

a n d to la g g e d excess d e m a n d — the la g
o n th e la tte r v a ria b le r e p re s e n tin g the
p ric e - a d ju s tm e n t d e lay .

T h e expecta-

E c o n o m is ts h av e lo n g u sed

tio n s - fo rm a tio n e q u a tio n e x p la in s h o w

s u c h m o d e ls to s tu d y h o w la g s a ffe c t

p rice a n tic ip a tio n s are g e n e ra te d a n d

the

revised in th e lig h t o f p a s t p ric e e x ­

speed

and

d u r a t io n

of

in fla tio n .

M o r e re ce n tly , suc h m o d e ls h av e be en

p e rience.

e m p lo y e d

e q u a tio n

lag s

on

to
the

in fla tio n a r y

e s tim a te

the

im p a c t

e ffe ctive ne ss
p o lic y .

T hese

of

of

anti-

m o d e ls

s p e c ify th e ch ie f d e te r m in a n ts o f th e

A s s h o w n b e lo w , the la tte r
expresses

th e

la g

b e tw e en

th e e x p e c te d a n d a c tu a l rates o f in f la ­
t io n

as

an

e x p o n e n tia lly - d e c lin in g

c u r r e n t a n d ex pe cte d fu tu r e ra te s o f

w e ig h te d
in fla tio n .

1 For a thorough review of
see the article by Laidler
especially pp. 774-81 that
similar to the one presented

- Some models of the inflationary process
contain a third equation that explains how
inflation-generating excess aggregate demand
is determined.

inflation models
and Parkin [7]
describe models
in this appendix.

av e rag e

of

past

rates

of

13

A

cr u d e

e q u a tio n

v e rs io n

m odel

is

of

f o llo w in g p a r a g r a p h s .8
s tr o n g ly

th is

p re s e n te d

twoin

the

I t s h o u ld be

e m p h a s iz e d ,

h o w e v e r,

th a t

th a t
(x

th e re
=

exists

no

z e r o ), th e n

excess

dem and

a c tu a l p ric e in f la ­

tio n p w ill ju s t e q ua l e x pe cte d in f la ­
tio n

p e_ 1( i.e.,

w ill

a n d th u s

s h o u ld

be in te rp re te d w ith

som e s k e p tic is m .

P re s e n te d s o le ly as

an

illu s tr a tio n ,

th e

m odel

to be r a is in g the irs.

th e

T h e s eco nd e q u a tio n of the m o d e l is
the

w h ic h th e y ex pect o th e r b u s in e s s m e n

process

at

at

s im p lif ic a tio n

c o m p le x

p rices

be

rate

r a is in g

a

th e ir

b u s in e s s m e n

the m o d e l c o n s titu te s a severe o v e r­
of

The Expectations-Formation
Equation

Tf, h o w e v e r, an

(-)

e x p a n s io n in d e m a n d raises x ab o v e

p u rp o s e ly

ze ro , b u s in e s s m e n w ill e v e n tu a lly re ­

o m its m a n y o f the v a ria b le s a n d b e ­
r e la tio n s h ip s

p ric e s at a ra te in excess o f the e x ­

c o m p le x ,

s o p h is tic a te d ,

e q u a tio n .

P“ = bp - f ( l - b ) p t' _ 1

a c t to th e excess d e m a n d b y r a is in g

h a v io r a l

e x p e c ta tio n s - fo rm a tio n

I t is w r itte n as fo llo w s :

th a t

a

and

m o re

re a lis tic

m o d e l w o u ld c o n ta in .

p e cte d rate o f in fla tio n .

T h is

re spo nse , h o w e v e r, is n o t
eous.

p ric e

in s t a n t a n ­

F o r a w h ile , q u a n titie s ra th e r

or, alternatively, as
(2a) pe E q u a t io n

pe_ t = b ( p - p u_ 1).

(2 a ) states th a t th e c h a n g e

in th e e x pe c te d ra te o f in f la t io n p° —
p ° _ j is p r o p o r t io n a l to th e a m o u n t by

The Price-Adjustment
Equation

t lia n p rices te n d to ab s o rb th e im p a c t

w h ic h th e p e r io d ’s a c tu a l in f la tio n

of

d e v ia te d

t e m p o r a r ily

expand

M ost

haps

th e ir

m o d e ls

m e c h a n is m

of

the

c o n ta in

e x p la in s h o w

in fla tio n a r y

an

e q u a tio n

th a t

th e c u rr e n t rate o f in ­

fla tio n is d e te r m in e d , i.e., the ra te at
w h ic h

b u s in e s s m e n

prices.

m ark

re ctly

w it h

and

p ric e

th e ir

O n e s u c h e q u a tio n s h o w s the

rate o f p ric e in fla tio n
x_j

up

la g g e d

w it h

excess

th e

incre a se

p v a r y in g

dem and

e x pe cte d

p**.

T he

d i­

excess

dem and

a llo w

d e p le te d .
a ffe c t

b u s in e s s m e n

o u tp u t

and

in v e n to rie s

T he se

dem ands

as

q u a n t it y
fo r

and

p rice s

e q u a tio n

of

fa c to r re sources a n d u ltim a t e ly in v o k e
co st incre ase s th a t s ig n a l th e
a b ilit y

of

r a is in g

the

ra te

p rice s are m a r k e d up.

d e s ir­

a t w h ic h

L a te r , th e re ­

fo re , b u s in e s s m e n re s p o n d to th e e x ­
cess d e m a n d b y ra is in g p rices.

is

s am e
oil

w r itte n as fo llo w s :

be

ch a n g e s

of

rate

p e r­

to

p ric e - a d ju s tm e n t

the d o w n s id e .

la g

T hus

T he

o pe rate s

if a s u b s e ­

q u e n t s la c k e n in g o f s p e n d in g causes
(1 )

p =

ax _j + p °_1

excess d e m a n d x to b e c o m e n e g a tiv e

w h e re p is th e c u rr e n t ra te o f in f la ­
tio n (e x p re s se d as a p e rc e n ta g e r a te ),
x _ x is
p e rio d ,

excess
p*5
—!

is

dem and
the

la g g e d

p re s e n t

one

p e rio d 's

e x pe cte d ra te o f in fla tio n fo re c a s t at
the e nd o f the p re c e d in g p e rio d , a n d
a is a c o e ffic ie n t s p e c ify in g h o w m u c h
each

u n it

c o n tr ib u te s
crease.

of

la g g e d

to

th e

excess

ra te

of

p ric e

in ­

T h e excess d e m a n d v a r ia b le

since b u s in e s s m e n in it ia lly re s p o n d to
c h a n g e s in d e m a n d b y a lte r in g q u a n ­
M o r e s pe cificall}', e x ­

cess d e m a n d x is re p re se n te d by the
d iffe re n ce
p a c ity

re al

b e tw e e n

a c tu a l

o u tp u t.

exceed

the

la tte r is d e fin e d

s o lu te

c a p a c ity

p h y s ic a l

and

A c tu a l

ca n

lim it

ca­

o u tp u t

o u tp u t

because

not

the

as

or

ab­

m a x im u m

c e ilin g le ve l o f o u t p u t b u t r a th e r as
the o u t p u t a s s o c ia te d w ith
o m y 's

no rm al

or

s ta n d a r d

the e c o n ­
level

of

o p e ra tio n .
E q u a t io n

(1 )

a

s itu a tio n

of

excess

s u p p ly )

th e a c tu a l ra te o f p ric e incre ase p w ill
e v e n tu a lly
ra te

fa ll

p*^.

b e lo w

T he

ke y

th e

e x pe cte d

w o rd

h ere

is

eventually because the la g p re v e n ts
p ric e s

fr o m

r e s p o n d in g

im m e d ia te ly

to s h ifts in d e m a n d .

states th a t if a g g r e ­

g a te d e m a n d a n d s u p p ly are e q u a l so

p e rio d

o n e - p e rio d d e la y o n
fo r

p ric e

th e

excess

a d ju s tm e n ts

to

la g

b e h in d s h ifts in d e m a n d .4 T h is pricea d ju s t m e n t

la g

is m e a n t

to

account

fo r the tim e it takes fo r d e m a n d p re s ­
sure to w o r k

b a c k w a rd

th r o u g h

the

in te r in d u s t r y s tru c tu re a n d fo r costs
to wT rk fo r w a r d .
o
a s s o c ia tio n

of

p ‘‘- i

w it h

th e

fa c to r o f p r o ­

ze ro a n d u n ity .
E m b o d ie d in the e q u a tio n is a p a r ­
tic u la r th e o ry — th e so-called adaptivee x p e c ta tio n s

or

e rro r- le a rn in g

p o th e s is — o f h o w

in fla tio n a r y

ta tio n s are fo rm e d .

hy­

e x p e c­

A c c o r d in g to the

e rro r- le a rn in g h y p o th e s is , p e o p le fo r ­
m u la te

e x p e c ta tio n s

about

th e in f la ­

tio n rate, o b serv e th e d is c r e p a n c y b e ­
tw e e n

the

a c tu a l

and

a n tic ip a te d

rates, a n d th e n revise th e a n tic ip a te d
ra te

by

som e

b e tw e e n
rates.

a c tu a l

the

to

th e

p re v io u s

of

and

E x p e c ta tio n s

p r o p o r tio n
w ith

fr a c tio n

th e

th e

are

re v is e d

e rro r
level

e rro r

a n tic ip a te d
in

a s s o c ia te d
of

e x p e c ta ­

tio n s .
ca n

also

fo r m u la te

be

show n

th a t

the

h y p o th e s is

is

p ric e

e x p e c ta tio n s

fr o m

p r io r p ric e ex p e rie n ce b y lo o k in g a t a
g e o m e tric a lly - w e ig h te d
past

rates

of

a v e ra g e

in f la tio n

w it h

of
the

w e ig h ts d im in is h in g e x p o n e n tia lly as
t im e recedes.

T h is a lte r n a tiv e in te r ­

p r e ta tio n o f th e ad a p tiv e - e x p e c ta tio n s
h y p o th e s is is w r itte n as fo llo w s :

T o s u m m a r iz e , the

the

p
as

e q u iv a le n t to th e th e o r y t h a t p e o p le

d e m a n d v a ria b le s y m b o liz e s th e te n ­
dency

in f la t io n

p o r tio n a lit y b h a v in g a v a lu e b e tw e e n

a d a p tiv e - e x p e c ta tio n s

The Price-Response Lag
T he

e x pe c te d

fo re c a s t at the e n d o f th e preceding-

It

dem and

x is m e a s u r e d in te rm s o f re al o u t p u t

tity p r o d u c e d .

(i.e.,

fr o m

co

p ric e - a d ju s tm e n t

(2b) p° = b

la g w it h th e excess d e m a n d v a ria b le

v
( l - b) i p _ 1
.
i= 0

x im p lie s th a t the im p a c t o f a s h ift in
dem and

is

in it ia lly

re g is te re d

on

x.

H ere

^

is

th e

summation operator

T h a t im p a c t is n o t im m e d ia te ly t r a n s ­

in d ic a t in g th e m a t h e m a t ic a l o p e ra tio n

m itt e d to p rice s, h o w e v e r.

of

In s t e a d it

a d d in g

a su c ce s sio n

or

series of

is t r a n s m itt e d firs t to q u a n titie s a n d

te rm s, in th is case th e w e ig h te d p as t

s u b s e q u e n tly to costs.

rates

P ric e s d o n o t

re s p o n d u n til r is in g costs in d u c e th e m
:1 The model presented here is adapted from
similar models developed by Phillip Cagan
and David Laidler. See Cagan [2; pp. 94-6]
and Laidler [5, 6 ]. For an elementary de­
scription of Laidler’s model, together with a
diagrammatic illustration of its dynamic
properties, see Laidler and Parkin [7; pp.
776-8].

14




o f in fla tio n .
T h e summation
index i re p re se nts each p a s t tim e p e r i­

to d o so.

od

s ta r tin g

w it h

the

m ost

re ce n t

(i = 0) a n d e x te n d in g b a c k w a r d to the
1 More sophisticated models would express
the delayed price adjustment as a distributed
lag, i.e., a lag spread over a number of time
periods.

m o s t d is ta n t

( i= c o ) -

p_j

past

are

the

rate s

T h e v a ria b le s
of

in fla tio n ,

o ne fo r each o f the i p e rio d s s tre tc h ­

in g b a c k w a r d in to tim e .
ca ch

p a s t rate

c o r r e s p o n d in g
the

d e g re e

p_i

has

in flu e n c e

th e

e x p e c ta tio n s

p°.

as

T he

b

of

p ric e

o ne

arc
each

S ince , as m e n ­

the

is

fo r

a

c o e ffic ie n t

fr a c tio n

of

w hose

m a g n it u d e lies b e tw e e n ze ro a n d one,
it fo llo w s
als o

th a t

th e

te r m

be a fr a c tio n .

( 1 —b )

w ill

since

any

A nd

g iv e n fr a c tio n ra is e d to p ro g re s s iv e ly
h ig h e r in te g r a l p o w e rs y ie ld s succe s­
s iv ely s m a lle r n u m b e r s , it fo llo w s th a t
th e w e ig h ts ( 1 — b)* m u s t decrease as
th e

exponent

w e ig h ts

i

m ust

increases,

d im in is h

i.e.,

the

the

fu r th e r

b a c k in tim e o n e lo o ks.
G r a p h ic a lly ,
t r ib u te d

th e

w e ig h ts

an

a lo n g

e x p o n e n tia lly

are

d is ­
de­

c lin in g c u rv e w h o s e slope re fle cts the
speed o f a d ju s t m e n t o f e x p e c ta tio n s .
A

steep

slo p e

re p re se nts

a

s h o rt

w e ig h t in g s ch e m e , im p ly in g s w ift a d ­
ju s t m e n t , a n d c o n v e rs e ly
tiv e ly fla t slope.

fo r a re la ­

g re a te r a n d th e c o rr e s p o n d in g a d ju s t ­

(1 — b ) .

A

v a lu e

r a p id ly

rates

The Expectations Lag

as tim e

T h e p re c e d in g d is cu s sio n c le a rly i m ­

b e lie v e
c ie n t

tio n s

a n tic ip a tio n s

is

la g

can

be

d e fin e d

in

te rm s

c o e ffic ie n t o f e x p e c ta tio n s

b.

T h e c o e ffic ie n t b itse lf m e asure s the

tu te s

th a t

can
one

th a n

fo r

lo w

and

F in a lly , s o m e o b se rv e rs

m e n t p o lic y .

o f th e

th e

be

e x p e c ta tio n s

in flu e n c e d

by

c o e ffi­
g o vern­

I n fa ct, th is idea c o n s ti­

r a tio n a le

fo r

d ire c t

w age

a n d p ric e c o n tr o ls .5

speed o f a d ju s tm e n t o f e x p e c ta tio n s
to

e x pe rie nce ,

i.e., the

q u ic k n e ss

of

re s p o n s e o f p u to re alize d a c tu a l rates
o f in fla tio n p.
T h e av e rag e le n g th o f the e x p e c ta ­
tio n s

la g

is

The Complete System
T a k e n to g e th e r, th e p ric e - a d ju s tm e n t

th e

c o u n te rp a rt

of

the

speed o f a d ju s tm e n t. T h is la g is e x ­
p re sse d as ( 1 —b ) / b .

T h e closer b is

to 1, th e s h o rte r the lag .

I 11 th e ex ­

tre m e case w h e re b e q uals 1, th e la g
is n o n e x is te n t; a n d the ex pected rate
o f in fla tio n a d ju s ts in s ta n ta n e o u s ly to
th e c u rr e n t rate.

T h u s w h e n b is set

e q u a l to 1 in the ex pectations-form a-

a n d e x p e c ta tio n s - fo rm a tio n e q u a tio n s
s u m m a r iz e

the

fla t io n a r y

tra n s m is s io n

pe =

of

th e

in ­

m e c h a n is m .

T h e s e tw o e q u a tio n s e x p la in the m u ­
tu a l d e t e r m in a tio n o f a c tu a l a n d
p e c te d rates o f p ric e increase.

ex­

T hey

als o in d ic a te th e ite ra tiv e in te r a c tio n
p ro ce ss w h e re b y

th e

e x pe c te d

in f la ­

tio n ra te in flu e n c e s th e a c tu a l c u r r e n t
rate, w h ic h in t u r n b e c o m e s a d e te r­
w h ic h

(2 )

o p e r a tio n

m in a n t o f n e x t p e r io d ’s e x p e c te d rate,

tio n e q u a tio n
b p - (1 —b ) p e_ x,
f-

a n tic ip a te d

and

a c tu a l

feeds b a c k

a c tu a l rate, etc.
p, i.e.,

in fla tio n

are

a lw a y s id e n tic a l.
O n the o th e r h a n d , the la g w ill be
lo n g e r th e closer b is to zero.

I n the

m a r ily 011 re ce n t e x perience.

e x tre m e case w h e re b e q uals zero, the

in to

n e x t p e r io d ’s

M o re o v e r, the m o d e l

d e m o n s tra te s h o w in fla tio n a r y e x p e c ­
ta tio n s o p e ra te to le n g th e n the la g g e d
a d ju s t m e n t

of

p rice s

s h ifts in d e m a n d .

fu tu r e p ric e e x p e c ta tio n s d e p e n d p r i­
O 11 the

p ric e

in fla tio n

p lie s th a t the le n g th o f the e x p e c ta ­

th e e q u a tio n collapse s to p e =

recedes, a n d

of

s te a d y rates.

( 1 —b )

of

of

m e n t la g s h o rte r fo r h ig h a n d v o la tile

o f the

clo se to ze ro im p lie s th a t the w e ig h ts
d e c lin e

s e n s itiv ity

d is ta n t experience.

T h e slope its e lf is

d e te r m in e d b y th e m a g n it u d e
fr a c tio n

e m p h a s is g iv e n to re ce n t ra th e r th a n

each

w e ig h ts

( 1 —b ) 1
,

p re v io u s ly ,

e x p e c ta tio n s

is a

th a t

fo r m a t io n

o f th e i tim e p e rio d s .
tio n e d

p_j

weight th a t m e a s u re s

of

011

e x pre sse d

A tt a c h e d to

o f in fla tio n

to

sho rt- ru n

T h is la tte r re s u lt is

o b ta in e d b y s u b s tit u t in g th e expectatio n s - fo rm a tio n

e q u a tio n

p ric e - a d ju s tm e n t

in to

e q u a tio n

and

the
th e n

o th e r h a n d , if (1 — b ) is closer to 1 in

la g is in fin ite ly lo n g , i.e., the ex pe cte d

s o lv in g

v a lu e , rate s o f in fla tio n fr o m th e m o re

ra te o f in fla tio n never c h a nge s.

s u lt in g “ re d u c e d f o r m ” e x p re s sio n is:

T h is

d is ta n t p a s t e n te r the e q u a tio n w ith
f o r m a t io n is d is c o u n te d m o re h e a v ily .

b a t ze ro in e q u a tio n (2 ), w h ic h y ie ld s
pe = p e _ 1 s h o w in g th a t the ex pe cte d
>

E c o n o m e t r ic ia n s w h o h av e a tte m p te d

ra te o f in fla tio n alw a y s re m a in s

un­

to fit e q u a tio n

a lte re d fr o m th e p re c e d in g p e rio d .

In

fo r

p.

T he

re ­

r e s u lt ca n be d e m o n s tra te d b y s e ttin g

h ig h e r w e ig h ts , a n d re ce n t p ric e

re c u rs iv e ly

(2 b )

in ­

to the s ta tis tic a l

d a ta h av e fo u n d th e fr a c tio n (1 — b ) to

s h o rt, if b is zero, the la g is of in fin ite

be b o th s ig n ific a n tly g re a te r th a n ze ro

le n g th ; a n d e x p e c ta tio n s ne ver c h a n g e

a n d less th a n 1.

re g a rd le s s

th a t

w h ile

T h e s e fin d in g s im p ly

p e o p le

h ig h e r w e ig h ts

g e n e ra lly

to m o re

a s s ig n

re ce n t p h e ­

of w h a t

is

h a p p e n in g

to

th e a c tu a l rate o f in fla tio n .
One

p o s s ib le

of

the

2

x_j

i= 2
w h e re the s e c o n d te rm o n th e righ th a n d side o f th e e q u a tio n re p re se n ts
th e

d e la y e d

p ric e

im p a c t

of

excess

d e m a n d a t tr ib u ta b le to th e o p e r a tio n
s tate s

th a t

once

p ric e

E q u a t io n (3 )
a n tic ip a tio n s

e rro r- le a rn­

e n te r in to p ric e - s e ttin g b e h a v io r, th e y

n a te th e c u m u la t iv e w e ig h t o f a ll p as t

in g m o d e l is th a t it re g ard s the speed

te n d to p r o lo n g th e in fla tio n a r y p r o ­

p ric e ex pe rie nce .

s h o rt, p ric e a n ­

o f a d ju s t m e n t o r c o e fficie n t o f e x pe c­

cess.

to

ta tio n s

r e s p o n d n o t o n ly to la s t p e r io d ’s e x ­

n o m e n a these w e ig h ts do n o t d o m i­

t ic ip a tio n s

In

c o n tin u e

re fle c t

past

or

p = a x _ j + ab

o f th e e x p e c ta tio n s lag .

s h o r tc o m in g

ad a p tiv e - e x p e c ta tio n s

co
(3 )

b as a fix e d c o n s ta n t.

A nd

T hey

cause

c u r r e n t p rice s

p ric e ex pe rie nce , w h ic h e x p la in s w h y

since b d e te rm in e s b o th the le n g th of

cess d e m a n d

th e e x p e c te d fu tu r e

th e e x p e c ta tio n s la g a n d the s lo p e of

to

m a n d in the m o r e d is ta n t p ast.

ra te o f in fla tio n

does n o t a d ju s t in s ta n ta n e o u s ly to the

th e

c u r r e n t rate.

tr ib u te

the

lag ,

m o d e l,

by

im p lic a tio n ,

T o s u m m a r iz e , e q u a tio n (2 b ) states

w e ig h t in g

p a tte r n
it

used

fo llo w s

to

d is ­

th a t

the

also

b u t als o

to

excess

de­

F in a lly , the m o d e l id e n tifie s excess
dem and

as

th e

p r o x im a te

sou rce

of

treats

of

the se p h e n o m e n a as g iv e n c o n s ta n ts .

c h a n g e o f p rice s is b ase d o n a g e o ­

T h is tr e a tm e n t is s u re ly to o re s tric ­

m e tr ic a lly d e c lin in g w e ig h te d av e rag e

tive.

o f p a s t rates o f c h a n g e o f prices.

to the m o d e l, th a t the c o e ffic ie n t b is

th a t

th e

e x p e c te d

fu tu r e

ra te

T he

S o m e a n a ly s ts th in k , c o n tr a r y

e q u a tio n th e re fo re

c o n s titu te s a p re ­

ca p a b le o f b e in g in flu e n c e d b y o u ts id e

cise

of

in fo r m a tio n

sense

s p e c ific a tio n
n o tio n

th a t

the

co m m o n -

e x p e c ta tio n s

b ase d 011 p a s t e x pe rie nce w ith




are
m o re

and

by

th e ra te o f in fla tio n

the

b e h a v io r

itself.

of

F o r ex­

a m p le , it has been sug g e ste d th a t the

5 The argument here is that by directly alter­
ing the expectations coefficient controls
could speed the downward adjustment of
price expectations necessary for the removal
of inflation.
Of course controls might also
speed the adjustment process simply by con­
straining the actual rate of inflation below
the level that would otherwise occur at a
given level of unemployment. In the latter
case, controls would take the expectations
coefficient as a given constant.

15

in fla tio n .

S p e c ific a lly , th e m o d e l i m ­

p lie s th e f o llo w in g c a u sa l ch a in .
(1 ) I n f la t io n

R E FE R E N C E S
1.

CaMan, P hilip. The Hydra-Headed M onster. The
Problem of Inflation in the United States. Wash­
ing Lun, D. C .; American Enterprise Inslilule for
Public Policy Research, 1974.

2.

. “ Changes in the Recession Behavior of
Wholesale Prices in the 1920’s and Post-World
W ar II,” Explorations in Economic Research, 2
(Winter 1975), 90-6.

3.

. “ Inflation and Market Structure, 19671973,” Explorations in Economic Research, 2
(Spring 1975), 203-16.

is d e te r m in e d b y ex­

e x p e c ta tio n s .
(2 ) In f la t io n a r y
e x p e c ta tio n s
are
g e n e ra te d b y p re v io u s in f la ­
t io n a r y e x p e rie n ce a n d hence
b y p r e v io u s excess d e m a n d .
(3 ) T h e re fo re ,
excess
dem and —
p a s t a n d p r e s e n t— is th e p r o x i­
m a te cau se o f in fla tio n .
T he

of

ex­

cess d e m a n d is m a d e e x p lic it in

in fla tio n - g e n e r a tin g

ro le

the

re d u c e d - fo rm e q u a tio n (3 ) w h e re p as t
le ve ls o f x c o n s titu te
p e n d e n t v a ria b le s .

th e

sole in d e ­

T h e m o d e l does

4. Friedman, Milton. “ Rediscovery of Money-Discussion,” American Economic Review, 65 (May
1975), 178.
5.

Laidler, David. “ The Influence of Money on Real
Income and Inflation: A Simple Model with some
Empirical Tests for the United States 1953-72,”
Manchester School of Economic and Social Stud­
ies, 41 (December 1973), 367-95.

6.

. “ The 1974 Report of the President’s
Council of Economic Advisers: The Control of
Inflation and the Future of the International
Monetary System,” American Economic Review,
64 (September 1974), 535-43.

7.

and Michael Parkin.
“ Inflation: A
Survey,” Economic Journal, 85 (December 1975)
741-809.

8.

Selden, Richard.
“ Monetary Growth and the
Long-Run Rate of Inflation,” American Eco­
nomic Review, 65 (May 1975), 125-8.

n o t e x p la in h o w excess d e m a n d itse lf
is

g e n e ra te d .

Such

an

e x p la n a tio n

w o u ld r e q u ire a n a d d itio n a l e q u a tio n
e x p re s s in g
cess

th e

dem and

re la tio n
and

b e tw e e n

th e

v a ria b le s t h a t d e te r m in e it.
m i n im u m ,

th e

v a ria b le s

lis t

w o u ld

ex­

in d e p e n d e n t

of

A t a v e ry

in d e p e n d e n t

in c lu d e

th e

m oney

s to c k since excess d e m a n d c a n n o t be
lo n g s u s ta in e d w it h o u t th e m o n e ta r y
g r o w t h n e c e ssa ry to s u p p o r t it. N o te ,
h o w e v e r, t h a t
s it u a t io n

in

th e re

is

w h ic h

at

le as t

excess

o ne

dem and

w o u ld p r o p e r ly be tre a te d as a n in d e ­
p e n d e n t v a r ia b le a n d th e m o n e y s to c k
as a d e p e n d e n t v a r ia b le .

S u c h w o u ld

be th e case if s o c ie ty w e re c o m m itte d
to a fu ll- e m p lo y m e n t o b je c tiv e in e x ­
cess

of

th e

n a tu ra l

or

le v e l o f e m p lo y m e n t.

e q u ilib r iu m

H e r e th e p o li­

c y m a k e r s w o u ld be e x pe c te d to p u r ­
sue th e ta r g e t e m p lo y m e n t ra te
le v e l

of

excess

d e m a n d ),

p e r m it t in g th e m o n e y

(o r

p a s siv e ly

s to c k a n d the

ra te o f in fla tio n to a d ju s t so as n o t to
in h ib it a t t a in m e n t o f th e fu ll- e m p lo y ­
m e n t g o a l.

In

th is case th e level of

excess d e m a n d w o u ld

e n te r th e sys­

te m as a d a t u m to d e te r m in e th e size
o f th e m o n e y s to c k .
upon

th e

m and

m ay

p o lic y

T h u s , d e p e n d in g

re g im e ,

appear

e ith e r

excess

de­

as

en­

an

d o g e n o u s o r a n e x o g e n o u s v a ria b le .

Thom as M. H u m ph rey

16




Highlights

Earnings and Capital Accounts
N et ea rn in gs b e fo r e p a y m e n ts to the U n ite d
States T re a su r y in cre a se d b y $12,919,998.92 to
$425,908,683.34 in 1975.

S ix p e rc e n t sta tu to ry

d iv id en d s to ta lin g $3,061,297.26 w e r e p a id to
F ifth D is trict m e m b e r b a n k s, an d the su m o f
$420,755,286.08 w a s tu rn e d o v e r to th e U n ite d
States T re a su ry .
C apital

s to ck

in cre a s e d

by

$2,092,100

to

$51,784,900 as m e m b e r b a n k s in cre a se d th eir
sto ck h o ld in g s in th is B a n k , as re q u ire d b y la w ,
to r e fle c t the rise in th eir o w n ca p ita l and su r­
plu s a cco u n ts. T h e B a n k ’s su rp lu s a c c o u n t in ­
crea sed $2,092,100 to a to ta l o f $51,784,900.

Discount Rate
In ea rly

1975 th e F e d e ra l R e s e r v e

R ic h m o n d

lo w e re d

its

d is c o u n t

B ank o f

rate s e v e ra l

tim es in resp on se to th e w e a k e n e d e c o n o m y
and d e c lin in g m a rk et in te re st rates. O n J a n u ­
ary 6, the d is co u n t rate w a s r e d u c e d fro m 7^4
p e rce n t to 7^4 p e rce n t, fo llo w in g a q u a rte r
p o in t re d u ctio n on D e c e m b e r 10, 1974.
The
rate w a s fu rth er re d u c e d to 6^4 p e rce n t on
F e b ru a ry 5, to 6 % p e r ce n t on M a rch 10, an d to
6 p e rce n t on M a y 16.
D is co u n t o p e ra tio n s at th e

B a ltim o r e and

C h a rlotte O ffic e s w e r e c o n s o lid a te d w ith th o s e
o f the R ic h m o n d O ffic e , e ffe c tiv e J u n e 1. T h is
co n s o lid a tio n w a s e ffe c te d in o rd e r to re d u ce
co sts and to help a ssu re u n ifo r m ity o f d is co u n t
w in d o w

a d m in istra tio n

th r o u g h o u t

the

D is ­

trict.

New Building Program
G ro u n d w as b ro k e n

fo r

th e n e w

R ic h m o n d

B ank b u ild in g on A p r il 18, 1975, an d c o n s tr u c ­
tion is w e ll u nder w a y .
T h e B an k is in e ffe c t its o w n g e n e ra l c o n ­
tra ctor, a ctin g th r o u g h an a g e n t, D a n ie l I n te r ­
n a tion a l C o rp o ra tio n , G r e e n v ille , S ou th C a r o ­
lina, s e rv in g as C o n s tr u c tio n M a n a g e r.

D a n ie l

is re sp o n sib le fo r th e d a ily su p e r v isio n and
c o o rd in a tio n o f th e m a n y c o n tr a c to r s in v o lv e d
O ff ic ia ls o f the F e d e r a l R e s e rv e B a n k o f R ic h m o n d
b ro k e g r o u n d o n A p r il 18, 1975, fo r n e w B a n k b u ild in g
o n p r o p e r ty o v e r lo o k in g th e J a m e s R iv e r in the M a in to -the-Jam es d e v e lo p m e n t area.
P ic tu r e d fr o m le ft
to r ig h t are G e o rg e C. R a n k in , F ir s t V ic e P r e s id e n t,
R o b e r t P . B la c k , P re s id e n t, R o b e r t W . L a w s o n , J r .,
C h a ir m a n o f th e B o a r d , E . C r a ig W a l l , Sr., D e p u ty
C h a ir m a n o f th e B o a r d , a n d R ic h m o n d C ity M a y o r ,
T h o m a s J . B lile y , J r .




in

the

co n str u c tio n

of

th e

M o r s e /D ie s e l, In c. o f N e w
C o n stru ctio n C o n su lta n t.

b u ild in g ,
Y ork

w ith

s e r v in g as

W it h a tota l p r o je c t

size o f 1,046,000 g r o s s sq u a re fe e t, th e b u ild in g
w ill in clu d e a 2 6 -s to r y to w e r , a b e lo w -g r a d e
g a ra g e ,

and

th ree

a d d itio n a l

le v e ls

b e lo w

17

F u n d s T r a n s fe r S y ste m .
rl

11

sorts

fr a n c a r fm n c

rm

The A C H

1 - -th em e le c tr o n ic a lly

and th rift in stitu tio n s.

n i o o -n p f ir*

re ce iv e s
fo n p

----- ^
to en d p oin t

otirl

banks

E n d p o in t ban ks w ith

c o m p u te r ca p a b ilitie s re ce iv e m a g n e tic tapes
c o n ta in in g tra n sa ctio n s fr o m

the A C H .

A ll

o th e r e n d p o in t b a n k s r e ce iv e hard c o p y p r in t­
ou ts s h o w in g th e d eta ils o f tra n sa ction s fo r
manual or mechanical posting to their deposi­
tors’ accounts. T h e A C H is now processing payroll
deposit transactions fo r the U .S . A ir F orce and
the V ir g in ia A u to m a te d C le a rin g H o u s e A s ­
so cia tio n ( V A C H A ) ban k s.
O th e r tra n sa c­
tion s, b o th d e b it an d cred it, w ill be h an d led b y
the A C H as m o re b an k s and th rift in stitu tion s
b e c o m e p a rticip a n ts.
R e g io n a l

cle a r in g

ce n te rs

at

R ich m o n d ,

C h a rlotte, and C o lu m b ia w e re fu lly im p le ­
m en ted in A p r il to p e rm it o v e r n ig h t co lle c tio n
o f ch e ck s on in tr a -te r r ito r y ban k s.
T h e v ie w is ta k e n fr o m the s o u th e a s t co rn er o f th e
b u ild in g .
T h e p ic tu r e sho w s p ro g re s s t h r o u g h m idJ a n u a r y 1976.

R e s p o n s i­

b ility fo r the cle a r in g o f ch e ck s fo r eastern
N o rth C a rolin a b a n k s has been a ssu m ed b y
th e C h a rlo tte O ffic e and r e s p o n s ib ility fo r all
o f S ou th C a rolin a b y th e C o lu m b ia O ffic e .

g ra d e .
M in o r u Y a m a sa k i & A s s o c ia te s
T r o y , M ic h ig a n , d e sig n e d the b u ild in g.
The

e x c a v a tio n

of

a p p ro x im a te ly

of

320,000

c u b ic y a rd s o f d irt and 20,000 c u b ic y a rd s o f
g ra n ite le ft a fo u r -a c r e h ole, 40 to 50 feet deep.

In

S e p te m b e r, the C h a rlo tte O ffic e op e n ed th ree
a d d ition a l re la y sta tio n s in G ree n v ille, L u m b e rto n , and R a le ig h .
P la n s are to h a v e the W e s t V ir g in ia
g io n a l C le a rin g C en ter o p e ra tio n a l b y

R e­
th e

T h e u n d e r g r o u n d p o rtio n o f the b u ild in g is
n o w ra p id ly ta k in g shape, and the m a m m o th

fo u rth q u a rter o f 1976.

h o le

ch a rg e o f the C en ter, and a b u ild in g has been

is b e in g

fille d

w ith co n c r e te and steel

R ich a rd L . H o p k in s

has been a p p o in te d A ss is ta n t V ic e P resid en t in
leased in C h a rleston , W e s t V ir g in ia , to h ou se

su b stru c tu re . B y th e end o f 1975, 5,153 c u b ic
y a rd s o f c o n c r e te h ad been p o u re d and 706 to n s

the C enter.

o f steel had b een erected .

W h ile there is still

plan s to re lo ca te its ch e ck o p e ra tio n s in J a n u ­

m u ch w o r k to b e d o n e b e lo w g ra d e, steel w o r k
on th e t o w e r has b e g u n .

ary 1976 in lea sed q u a rters in su b u rba n B a lti­
m ore.

In a d d itio n , th e B a ltim ore O ffic e

T h e r e h a v e b e e n n o m a jo r p ro b le m s to date,
an d it is a n ticip a te d that the ov e ra ll sch ed u le
fo r c o m p le tio n o f the p r o je c t w ill be m a in ­

Fifth District Communications

tained. T h e sch e d u le calls fo r o c c u p a n c y b y
late 1977 or e a rly 1978.

w h ich is in te r c o n n e cte d w ith co m p u te r c o m ­

T h e B o a r d o f G o v e r n o rs has a u th orized c o n ­

munications systems in each Federal R eserve D is­

stru ctio n o f a n e w B a ltim o re B ra n ch B u ild in g
fo llo w in g c o m p le tio n o f the n e w b u ild in g fo r
the R ic h m o n d O ffic e .

trict experienced an 11 percent increase in traffic

A u t o m a te d

C le a rin g H o u s e

C o m m u n ica tio n s

in 1975.

S y ste m

at

C u lp ep er,

F u rth e r sig n ific a n t in crea ses are e x ­

p e cte d in the n ear fu tu re b e ca u se o f ch a n g e s in
the p a y m e n ts m e ch a n ism . A re p la cem en t p r o ­
g ra m fo r certa in e q u ip m e n t w ith in the C o m ­

Check Collection Operations
An

The

m u n ica tio n s S y ste m w a s b e g u n in 1975.
(A C H )

w as

the C o m m u n ic a tio n s S y ste m

now

W it h

fiv e yea rs

e sta b lish e d at th e R ic h m o n d O ffic e as the first

o ld , se le cte d e q u ip m e n t is b e in g rep la ced to

step in the im p le m e n ta tio n o f an E le c tr o n ic

in su re co n tin u e d s a tis fa cto r y op e ra tion .

18




Fiscal A gen cy

the N a tio n ’s B ice n te n n ia l A n n iv e r s a r y w ith a

In 1975, a n ew m e th o d o f auctioning- T re a s u ry
secu rities w a s in tr o d u c e d b y th e T r e a s u r y D e ­
p a rtm en t. T h e n e w a u c tio n in g m e th o d solicits

red esig n o f the S eries E S a v in g s B o n d ,

Sale

o f the re d e sig n e d b o n d b e g a n in M a y anu w ill
co n tin u e th ro u g h

1976.

The

T reasu ry

a lso

a n n o u n ce d the o ffe r in g o f In d iv id u a l R e tir e ­

b id s b y y ie ld rath er than b y p rice, w h ich e lim i­

m en t B o n d s p u rsu a n t to th e E m p lo y e e R e tir e ­

n ates the p o s s ib ility o f n e w

m en t In co m e S e c u r ity A c t o f 1974.
T hese
b o n d s, w h ich are e s p e c ia lly d e sig n e d fo r p e r­

se cu ritie s being-

issu ed a b o v e p ar and c o n fu s in g in d iv id u a l in ­

son s w h o are n o t c o v e r e d b y a r e tire m e n t plan,

v e sto rs.
The

T re a s u ry

D e p a rtm e n t

c o m m e m o ra te d

w e n t on sale in J an u ary.

N ew M em ber Banks
T h e fo llo w in g n e w ly ch a rte re d b an k s in the
F ifth D is trict op e n e d fo r b u sin e ss d u rin g the
y e a r as m e m b ers o f the F e d e ra l R e s e r v e S y s ­
tem .
N ational Banks
M ountain N ational Bank
H ilton H ead N ational Bank
Century N ational Bank
R epublic N ational Bank
Lincoln N ational Bank
G ulf N ational Bank
D om inion N ational Bank o f
F rederick sbu rg
D iplom at N ational Bank

Beaver, W est V irgin ia
H ilton Head Island, South Carolina
Bethesda, M aryland
Columbia, South Carolina
G aithersburg, M aryland
Sophia, W est V irg in ia

A p ril 1
A p ril 7
June 7
June 30
Septem ber 25
N ovem ber 21

Fredericksburg, V irgin ia
W ashington, D. C.

D ecem ber 5
D ecem ber 15

Grundy, V irg in ia
Eden, N orth C arolina
Stephens City, V irg in ia
H arpers F erry , W est V irg in ia

Ja n u a ry 2
J a n u a ry 13
M arch 21
Ju ly 17

S tate Banks
M iner’s and M erchant’s Bank and
T rust Com pany
The Bank o f Eden
Bank o f F rederick County
Bank o f H arpers F erry

T h e fo llo w in g sta te -ch a rte re d b a n k s c o n v e r te d
to m em b ersh ip in the F e d e ra l R e s e r v e S y ste m
d u r in g the year.
Bank o f V irg in ia T ru st Com pany
Richmond, V irgin ia
(N on depository In stitu tion )
Bank o f V irgin ia-R oan oke V alley
Vinton, V irgin ia
(converted to Bank o f V irg in ia, N .A .)

Changes in Directors

e a rly fall.

A p ril 14
A u g u st 1

J. O w e n

C o le , C h a irm a n

o f the

F ifth D is tr ic t m em b e r b a n k s e le cte d o n e C lass

B o a rd and P re sid e n t, F irst N a tio n a l B a n k o f

A a n d on e C lass B D ir e c to r to th re e -y e a r term s

M a ry la n d , B a ltim o re , M a ry la n d , w a s e le cte d a

on the R ic h m o n d B o a rd o f D ir e c to r s in the

C lass A D ir e c to r to s u c c e e d J o h n H . L u m p ­




19

kin, C h a irm a n o f the B o a rd and C h ie f E x e c u tiv c

O ffic e r

S ou th

Ccir’oliTm

Federal Advisory Council
T Li1 V .
o
1

i

B ank, C o lu m b ia , S ou th C a rolin a, w h o se term
e x p ire d at th e end o f 1975.

n o t* rl

n w c v iv *

n -f

W1

T
w

i . v v - i w . o

n rv rv r\iM f n rl

I /~ vL

I—I

±±.

j w i l il

L u m p k in , C h a irm a n o f the B uard and C h ief

O s b y L . W e ir ,

E x e c u t iv e O ffic e r , T h e S ou th C a ro lin a N a tio n ­

R e tire d G en era l M a n a g e r, M e tro p o lita n W a s h -

al B ank , C o lu m b ia , S ou th C a rolin a , to a o n e y e a r term b e g in n in g Ja n u a ry 1, 1976, as the

in g to n -B a lt im o r e

A re a ,

Sears,

R oebu ck

and

C o m p a n y , w h o resid es in K e n s in g to n , M a r y ­
land, w a s re e le cte d b y ban k s in G ro u p 1 as a
C lass B D ir e c to r.
T h e R ic h m o n d B o a rd re a p p o in te d W illia m
W . B ru n e r, C h airm an o f the B o a rd and P r e s i­
den t, F irst N a tio n a l B ank o f S ou th C arolin a,
C o lu m b ia , S o u th C a rolin a , to a th re e -y e a r term
on th e C h a rlo tte B o a rd .

C ath erin e B. D oeh ler,

S e n io r V ic e P re s id e n t and S e cre ta ry , C h esa ­

F ifth F e d e ra l R e s e r v e D is tric t re p resen ta tiv e
on th e F e d e ra l A d v is o r y C o u n cil. T h e tw e lv e m e m b e r C o u n cil, c o n s is tin g o f o n e m em b er
fro m ea ch o f the F ed era l R e s e r v e D istricts,
m eets at lea st q u a rte rly in W a s h in g to n w ith
the S y s te m ’s B o a rd o f G o v e rn o r s to d iscu ss
b u sin e ss c o n d itio n s and o th e r to p ic s o f cu rren t
in terest to th e S y stem .
T hom as

I.

S torrs,

M r. L u m p k in su cce e d s

C h airm an

of

th e

B oa rd ,

N C N B C o r p o r a tio n , C h a rlotte, N o rth C a rolin a.

p ea k e F in a n cia l C o rp o ra tio n , B a ltim o re , M a r y ­
lan d, w a s a p p o in te d b y the R ic h m o n d B o a rd
to a th re e -y e a r term on the B a ltim o re B oa rd

Changes in Official Staff

to s u cce e d J a m es R . C h a ffin ch , Jr., P resid en t,

In F e b r u a ry , C harles H . Im e l, A s s is ta n t V ic e

The

P re s id e n t, C u lp e p e r F a c ility , e le c te d to take
ea rly r e tire m e n t a fte r n ea rly 38 y e a rs o f ser­

D e n to n

N a tio n a l

B ank,

D e n to n , M a r y ­

lan d, w h o s e term e x p ire d at the end o f 1975.
The

B o a rd

of

G overn ors

d e sig n a te d

E.

A n g u s P o w e ll, P re sid e n t, C h e ste rfie ld L a n d &
T im b e r

C o r p o r a t io n ,

R ich m o n d ,

V irg in ia ,

C h a irm a n o f the B o a rd o f D ir e c to r s fo r 1976.
E . C r a ig W a ll, Sr., C hairm an o f the B oa rd,
C an al In d u strie s, In c., C o n w a y , S ou th C a ro ­
lina, w a s re d e s ig n a te d D e p u ty C hairm an.
T h e B o a rd o f G o v e r n o r s a p p o in te d M a ce o A .
S loa n , S e n io r V ic e P resid en t, N o rth C arolin a
Mutual L ife Insurance Com pany, Durham, N orth
C a rolin a , to a th re e -y e a r term on the R ic h ­

v ic e to th e B ank.
w a s n a m ed

V ic e

In A p ril, J oh n G. S toid es
P re s id e n t at th e

C u lp ep er

O f f ic e ; an d in June, E liz a b e th W . A n g le w as
p r o m o te d to V ic e P re sid e n t at th e R ic h m o n d
O ffic e .
S e v e ra l ch a n g e s in th e o ffic ia l s ta ff at the
C u lp e p e r

F a c ility

o cc u r r e d

in

A u g u s t.

J.

G o r d o n D ick e r s o n , Jr., V ic e P re sid e n t in
c h a rg e o f th e C u lp e p e r O ffic e , e le cte d to take
ea rly re tire m e n t a fte r 37 y ea rs o f se rv ice.

C o­

in cid e n t w ith the re tire m e n t o f M r. D ick e rso n ,
A lb e r t D . T in k e le n b e r g , V ic e P re sid e n t, w a s

m o n d B o a rd , e ffe c tiv e Ja n u a ry 1, 1976, to s u c ­

n a m ed o ffic e r in ch a r g e o f C u lp ep er. Jam es G.

ce e d R o b e r t W . L a w s o n , Jr., S en ior P artner,

D e n n is w a s p r o m o te d to A s sista n t C ashier.

C h a rle sto n O ffic e , S te p to e & J oh n so n , C h a rles­
ton , W e s t V ir g in ia , w h o s e term ex p ire d at the

In N o v e m b e r , R ich a rd L . H o p k in s w a s a p ­

en d o f 1975.
T h e B o a rd o f G o v e rn o r s rea p p o in ted R o b e r t
C.

V ic t o r T u r y n w a s n a m ed A s sis ta n t C ashier
at th e B a ltim o r e O ffic e in S ep te m b e r.

E d w a r d s , P re sid e n t, C lem son

U n iv e rs ity ,

C le m so n , S ou th C a rolin a , to a th re e -y e a r term
on the C h a rlo tte B o a rd , e ffe ctiv e Ja n u a ry 1,
1976. T h e B o a rd o f G o v e r n o r s a lso rea p p oin ted

p o in te d A s s is ta n t V ic e P re sid e n t in ch a rg e o f
th e W e s t V ir g in ia R e g io n a l C le a rin g C enter,
w h ich sh o u ld op en in C h a rle sto n , W e s t V i r ­
g in ia , d u r in g th e fo u rth qu a rter o f 1976.
In D e c e m b e r , J a m es D . R e e se and Joh n A .
V aughan

w e re

p r o m o te d

to

A s s is ta n t

V ic e

D a v id W . B a rto n , Jr., P resid en t, T h e B a rton -

P re sid e n t at the R ic h m o n d O ffic e , and R o b e r t

G illet

a

F. S tra tto n w a s p ro m o te d to A s s is ta n t V ic e

th re e -y e a r term on the B a ltim o re B oa rd, e ffe c ­

P re sid e n t at the C h a rlotte O ffic e , all e ffe ctiv e
Ja n u a ry 1, 1976.

C om pany,

B a ltim o re ,

tiv e J a n u a ry 1, 1976.

20




M a ry la n d , to

Summary of Operations
C h e c k C le a r in g &

C o lle c t io n

1975

1974

Dollar amount
Commercial bank checks1 _____________________________________ ______
Government checks- ________________________________________________
Return items ________________________________________________________

376,290,433,000
33,364,921,000
3,733,115,000

316,943,290,000
27,457,303,000
3,240,226,000

1,010,313,000
91,981,000
13,402,000

963,470,000
83.555.000
11.371.000

5,550,979,800

5,173,286,100

Number of items
Commercial bank checks' ___________________________________________
Government checks2 ________________________________________________
Return items ________________________________________________________
C u r r e n c y & C o in
Currency disbursed— Dollar amount _________________________________
Coin disbursed— Dollar amount ______________________________________

250,493,039

220,512,550

... ........ ..

1,543,099,000

1,562,086,030

Dollar amount ______________________________________________________
Number _____________________________________________________________

6,123,409
1,037,824

6,174,253
1,034,596

Dollar amount of currency destroyed
Daily average of currency destroyed

D is c o u n t &

C r e d it

Dollar amount
Total loans made during year __________ ___________________________
Daily average loans outstanding __________________________________

2,374,1)44,000
9,424,381

26,692,631,203
105,504,471

61

137

Dollar amount ______________________________________________________
78,261,028,176
Number ________________________________________________________ __225,285

44,650,129,060
314,954

Number of banks borrowing during the year

..

......

_ ............ ......

F is c a l A g e n c y A c t iv it ie s
Mai'ketable securities delivered or redeemed

Coupons redeemed
Dollar amount ______________________________________________________
Number _____________________________________________________________

85,173,485
246,111

72,500,814
199,785

525,390,098
11,205,945

497,387,663
10,922,168

551,634,294
12,582,780

563,072,813
12,574,930

17,422,497,473
3,595,416

15,825,764,037
3,217,195

1,319,239,449,009

1,192,906,797,259

1,091,439

903,978

Savings bond and savings note issues
Dollar amount ---------------------------------------------------------------------------------Number ---------------------------------------------------------------------------------------------Savings bond and savings note redemptions
Dollar amount ----------------------------------------------------------------------------------Number ---------------------------------------------------------------------------------------------Depositary receits for withheld taxes
Dollar amount ------------------------------------------------------------------------Number -------------------------------------------------------------------------------------T r a n s fe r s o f F u n d s
Dollar amount -------------------------------------------------------------------------------------Number

_ . . . . ---------- ---------------------------------------------------------------------------

1 E xcluding checks on this Bank.
- Including postal m oney orders.




21

Comoarative Financial Statements
JL

Condition
D ec. 31, 1975

A sse ts:
Gold certifica te account _____ „

_ ___________________________________
_

980,758,985.89

$ 906,917,837.26

_

45,000,000.00

36.000.000.00

____

163,456,857.00

96,695,118.00

_______________________________________________________

41,702,042.72

17,096,290.84

7,100.000.00
490,667,000.00

50.400.000.00
374.620.000.00

Bills ______________________________________________________________
C ertificates _______________________________________________________
N otes _______ ____________________________________________________
Bonds ________ ___________________________________________________

3,006,609,000.00
_______
3,554,581,000.00
446,186,000.00

2.929.014.000.00
3.187.537.000.00
261.588.000.00

.......- ....... ......... ......... ........ .

7,007,376.000.00

6.378.139.000.00

7,505,143,000.00

6.803.159.000.00

2,004,212,527.61

1,081,878,452.08

22,457,016.36

14,400,594.88

Special Drawing- R ights certificate account

-

Federal Reserve notes o f other Federal Reserve B a n k s .......
Other cash _ ....
_

___

$

Dec. 31, 1974

LOAN S AND SEC U RITIE S:

Loans to m em ber banks _________ _ _________ _____________________
Federal a g en cy obligations
____________
__
__
_________
U. S. G overnm ent secu rities:

TOTAL U. S. GOVERNMENT SECURITIES
TOTAL LO A N S AND SECURITIES

Cash items in process o f collection
Bank prem ises

___ __________________________________

O peratin g e q u ip m e n t_____________

__________________________________

151,062.22

Other assets ___________________________________________________________

111,288,192.13

In terd istrict settlem ent account ______________________________________

—235,648,987.59

T O T A L A S S E T S __________________ ___________________________

$10,638,520,696.34

$9,058,406,586.95

$ 7,139,692,961.00

$6,493,192,313.00

_
Member bank reserves ____ ____ __________________________________
U. S. Treasurer— general account _________________________________
Foreign _____________________________________________________________
_____________________________________________________
Other ______

1,424,511,439.34
406,887,817.52
14,443,000.00
29,224,783.11

1,166,930,398.05
162,487,877.76
16,240,000.00
50,950,345.75

_________________________________________________

1,875,067,039.97

1,396,608,621.56

103,259,293.89

Liabilities:
Federal Reserve n otes_________________________________________________
D E PO SITS:

TOTAL DEPOSITS

Deferred availability cash items _____________________________________
Other liabilities

_____________________________________________________

TO T A L LIA B IL IT IE S

______

Capital Accounts:
Capital paid in
Surplus

1,437,571,220.35

985,166,474.07

_____ 82,619,675.02

84,053,578.32

10,534,950,896.34

8,959,020,986.95

51,784,900.00
49.692.800.00

--------------------------------------------------------------------------___________
__________________________

51,784,900.00

49.692.800.00

TO T A L LIA B IL IT IE S AN D C APITAL A CCOUN TS _____

$10,638,520,696.34

$9,058,406,586.95

Contingent liability on acceptances purchased for
foreign correspondents

22




$

55,036,800.00

Earnings and Expenses
1975

1974

Loans to member ban k s__________________________________________________
Interest on U. S. Government securities ________________________________
Foreign currencies _______________________________________________________
Other earnings ___________________________________________________________

$ 1,240,861.43
482,490,978.71
300,711.65
38,530.85

$ 15,331,149.15
448,313,739.99
381,877.42
145,096.65

TOTAL CURRENT EARN ING S ______________________________________________________

484,071,082.64

464,171,863.21

Operating expenses (including depreciation on bank premises) after
deducting reimbursements received for certain Fiscal Agency and
other expenses __________________________________________________________
Assessment for expenses of Board of Governors _______________________
Cost of Federal Reserve currency_______________________________________

41,837,190.21
1,870,000.00
4,230,047.47

39,891,328.18
2,287,600.00
3,694,938.25

_______________________________________________________

47,937,237.68

45,873,866.43

CURRENT N E T E A R N IN G S _____________________________________

436,133,844.96

418,297,996.78

Profit on sales of U. S. Government securities (net) _ _______
All other ______________________________________________________________

2,928,888.43
162,496.54

135,856.86

_____________________________________________________

3,091,384.97

135,856.86

Losses on sales of U. S. Government securities (net) _______________
Losses on Foreign Exchange transactions____________________________
All other _ _____________________________________________________________
_

13,298,860.69
17,685.90

3,071,996.67
1,902,026.85
471,145.70

TOTAL DEDUCTIONS ________________________________________________________________

13,316,546.59

5,445,169.22

N ET AD D ITIO N S OR DEDUCTIONS

-10,225,161.62

-5,309,312.36

N ET EAR N IN G S BEFORE P A Y M E N T S TO U. S. TR EASU R Y

$425,908,683.34

$412,988,684.42

$

$

E A R N IN G S :

EXPENSES:

N ET

EXPENSES

ADDITIONS TO CURRENT NET E A R N IN G S:

TOTAL

ADDITIONS

DEDUCTIONS FROM CURRENT N ET E A R N IN G S:

Dividends paid ___________________________________________________________
Payments to U. S. Treasury (Interest on Federal Reserve notes) _
Transferred to surplus __________________________________________________

3,061,297.26
420,755,286.08
2,092,100.00

2,936,699.16
407,257,185.26
2,794,800.00

$425,908,683.34

$412,988,684.42

Balance at close of previous year _______________________________________
Addition account of profits for year ____________________________________

$ 49,692,800.00
2,092,100.00

$ 46,898,000.00
2,794,800.00

B ALAN CE A T CLOSE OF CURRENT Y E A R ___________________

$ 51,784,900.00

$ 49,692,800.00

TOTAL ______________________________________________________________

Surplus Account

Capital Stock Account
(Representing amount paid in, which is 50% of amount subscribed)
Balance at close of previous year _______________________________________
Issued during the year __________________________________________________

$ 49,692,800.00
2,369,850.00

$ 46,898,000.00
3,736,000.00

$ 52,062,650.00

$ 50,634,000.00

Cancelled during the y e a r ________________________________________________

277,750.00

941,200.00

BALAN CE A T CLOSE OF CURRENT Y E A R ___________________

$ 51,784,900.00

$ 49,692,800.00




23

Directors

f n p e fim h p r 31. 197f>)

Richmond
R ob ert W . Law son, Jr. _________ Chairman o f the Board and F ed era l R eserv e A g e n t
E. C raig W all, Sr. ______________ D ep u ty Chairman o f the Board

Class A
Jam es A . H ardison, Jr. ________Chairman and P residen t, The F ir st N ation al B ank o f A nson C ounty
W adesboro, N orth Carolina
(T er m exp ires D ecem ber 31, 1977)
John H. L u m p k in _______________ Chairman o f the Board and C h ief E x e cu tiv e O ffic e r
The South Carolina N ational Bank
Columbia, South Carolina
(T er m expired D ecem ber 31, 1975)
Succeeded b y :

J. Owen Cole
Chairman o f the B oard and P resid en t
F ir st N ational B ank o f M aryland
B altim ore, M aryland
(T er m exp ires D ecem b er 31, 1978)

P lato P. P earson, J r . ___________ Chairman and P residen t, The C itizens N ation al Bank
Gastonia, N orth Carolina
(T er m exp ires D ecem ber 31, 1976)

Class B
A n d rew L. Clark _______________ P residen t, A n d y Clark F ord, Inc.
P rinceton , W es t V irginia
(T er m exp ires D ecem ber 31, 1976)
H en ry C lay H ofh eim er, II _____ Chairman o f the Board, V irgin ia R eal E sta te In vestm en t Trust
N orfolk , V irginia
(T er m exp ires D ecem ber 31, 1977)
O sby L. W eir ___________________R etired G eneral M anager, Sears, R oebu ck and Co.
B ethesda, M aryland
(T er m exp ires D ecem ber 31, 1978)

Class C
R ob ert W . Law son, Jr. _________ Senior P artn er, Charleston O ffice, S tep toe & Johnson
Charleston, W es t V irginia
(T er m expired D ecem ber 31, 1975)
S ucceeded b y :

M aceo A. Sloan
S enior V ice P resid en t
N orth Carolina M utual L ife In surance Co.
Durham , N orth Carolina
(T er m exp ires D ecem b er 31, 1978)

E . A n g u s Pow ell _______________ Presiden t, C h esterfield Land & T im ber Corp.
Richmond, V irgin ia
(T er m exp ires D ecem ber 31, 1976)
E . C raig W a ll, Sr. ______________ Chairman o f the Board, Canal In dustries, Inc.
Conw ay, South Carolina
(T er m exp ires D ecem ber 31, 1977)

Member Federal Advisory Council
Thom as I. Storrs _______________ Chairman o f the Board, N C N B C orporation
Charlotte, N orth Carolina
(T er m expired D ecem ber 31, 1975)
Succeeded b y :

24



John H. Lumpkin
Chairman o f the B oard and C h ief E xecu tiv e O ffice r
The South Carolina N ational Bank
Columbia, South Carolina
(T erm exp ires D ecem b er 31, 1976)

Baltimore
D avid W . Barton, Jr.

_________ Presid en t, The B arton-G illet Com pany
Baltim ore, M aryland
(T e r m exp ires D ecem ber 31, 1978)

J. P ierre Bernard ______________ Chairm an o f the Board, The A nnapolis B anking and T rust Com pany
Annapolis, M aryland
(T er m exp ires D ecem ber 31, 1977)
Jam es R. C h affin ch , Jr. ________P residen t, The D enton National Bank
D enton, M aryland
(T er m expired D ecem ber 31, 1975)
Succeeded b y :

*Jam es G. H arlow ____

Catherine B. D oehler
Senior V ice President and S ecreta ry
Chesapeake Financial C orporation
Baltim ore, M aryland
(T erm expires D ecem ber 31, 1978)

._ P resid en t, W es t V irginia U niversity
M organtow n , W est V irginia
(T e r m exp ires D ecem ber 31, 1977)

I. E. K illian _ __________________ M anager, E a stern Region, E x x o n Com pany, U .S.A.
_
B altim ore, M aryland
(T e r m exp ires D ecem ber 31, 1976)
J. Stevenson Peck

___ _______ Chairm an o f the Board, Union Trust Com pany o f M aryland
B altim ore, M aryland
(T e r m exp ires D ecem ber 31, 1976)

L acy I. Rice, Jr. ____________ ___P resid en t, The Old N ational Bank o f M artin sburg
M artin sburg, W est V irginia
(T e r m exp ires D ecem ber 31, 1976)

Charlotte
W . B. A pple, Jr. ________________ P resid en t, F ir st N ational Bank o f Reids villa
R eidsville, N orth Carolina
(T e r m exp ires D ecem ber 31, 1976)
Charles F. B e n b o w --------------------- S enior V ice P resid en t and D irector, R. J. R eynold s In du stries, Inc.
W inston-Salem , N orth Carolina
(T e r m exp ires D ecem ber 31, 1977)
T. L. Benson ___________________ P resid en t, The Conw ay N ational Bank
Conw ay, South Carolina
(T er m exp ires D ecem ber 31, 1976)
W illiam W . Bruner ____________ Chairm an o f the Board and President, F irst N a tion al B an k o f South Carolina
Columbia, South Carolina
(Term , exp ires D ecem ber 31, 1978)
"'Charles W . DeBell _______ ___ _ G eneral M anager, N orth Carolina W orks, W estern E le ctr ic Com pany, Inc.
W inston-Salem , N orth Carolina
(T e r m exp ires D ecem ber 31, 1976)
R obert C. E dw ards ____________ P resid en t, Clem son U niversity
Clemson, South Carolina
(T e r m exp ires D ecem ber 31, 1978)
John T. F ielder ________________ P residen t, J. B. Iv e y and Company
C harlotte, N orth Carolina
(T er m exp ires D ecem ber 31, 1976)

"B ran ch Board Chairm an




25

Officers

1 1P7f2)

Richmond
R obert P. Black
George C. Ivankin
W elford S. Farmer
John L. Nosker
James Parthemos

Assistant Vice President

President

John A. Vaughan

First Vice President

W ilbur C. Wilson

Assistant Vice President

Jack H. Wyatt

Assistant Vice President

James R. Slate

Assistant Counsel

Senior Vice President and
Special Legal Adviser
Senior Vice President
Senior Vice President and
Director of Research

John F. Rand
Raym ond E. Sanders, Jr.

II. Lewis Garrett

General Auditor
Assistant General Auditor

Senior Vice President
Senior Vice President

David B. Ayres, Jr.

Baltimore

Elizabeth W . Angle

Vice President

Jimmie R. M onhollon

Senior Vice President

Lloyd W . Bostian, Jr.

Vice President

W illiam E. Pascoe, III

Vice President

J. Alfred Broaddus, Jr.

Vice President

Gerald L. W ilson

John G. Deitrick

Vice President

Ronald B. Duncan

Vice President
Assistant Vice I*resident

George B. Evans

Vice President

Ronald E. Gould

Assistant Vice President

W illiam C. Glover

Vice President

Charles P. Kahler

Assistant Vice President

Robert A. Perry

Assistant Vice President

W illiam D. Martin, III

General Counsel

R obert D. M cTeer, Jr.

Vice President

Arthur V. Myers, Jr.

Vice President

Chester D. Porter, Jr.

Vice President

A ubrey N. Snellings

Vice President

Andrew L. Tilton

Vice President

James F. Tucker

Vice President

W infred W . Keller

Assistant Vice President

Joseph F. Viverette

Vice President

Fred C. Krueger, Jr.

Assistant Vice President

J. Lander Allin, Jr.

Assistant Vice President

0 . Louis Martin, Jr.

Assistant Vice President

Fred L. Bagwell

Assistant Vice President

Harry B. Smith

Assistant Vice President

Jackson L. Blanton

Assistant Vice President

Thomas E. Snider

Assistant Vice President

W illiam E. Cullison

Research Officer

Robert F. Stratton

Assistant Vice President

Jefferson A. Walker

Assistant Vice President

W yatt F. Davis
R oy L. Fauber
W illiam C. Fitzgerald

Chief Examiner

Assistant Cashier

Charlotte
Stuart P. Fishburne

Senior Vice President

Assistant Vice President
Assistant General Counsel

John E. Friend

Assistant Vice President

Bradley H. Gunter

Assistant Vice President
and Secretary

Robert B. Hollinger, Jr.

V ictor Turyn

Assistant Vice President

Columbia
Boyd Z. Eubanks
R. W ayne Stancil

Vice President
Assistant Vice President

Richard L. Hopkins

Assistant Vice President

John C. Horigan

Assistant Vice President

W illiam E. McLean

Assistant Vice President

Hobert D. Pierce

Assistant Vice President

John G. Stoides

Vice President

Assistant Vice President

Albert D. Tinkelenberg

Vice President

Barthonhue W . Reese

Assistant Vice President

Kenneth A. Adams

Assistant Vice President

James I). Reese

Assistant Vice President

Dale M. Cunningham

Assistant Vice President

Frank D. Stinnett, Jr.

Assistant Vice President

James G. Dennis

Joseph C. Ramage

26




Culpeper

Assistant Cashier