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L Contents From the Boardroom 2 National Scene 4 Western Business 8 Western Banking 13 Western Central Bank 15 Directors 24 Federal Reserve Bank of San Francisco MAR 0 6 1 978 LIBRARY Americans worked long and hard last year to produce almost $2 trillion of goods and services . Most business firms encountered stiff competition marketing their wares in domestic and international markets, and all were affected by surging costs of labor, ma chinery and material. But the nation's solid record of growth could not be gainsaid. Moreover, a larger propor tion of the working-age population had jobs than at any other time in the past generation, and household spend ing increased markedly under the spur of income gains which were un matched (even after adjustment for inflation) since the boom years of the early 1970's. Financial markets reflected these symptoms of a mature business expan sion. Credit extensions sharply outran GNP growth, rising about 30 percent above year-ago levels . Given that context, no one should have been surprised-although many were-that interest rates increased during the year. Short-term rates rose ab out two percentage points, reflecting both the growing strength of credit demands and a firmer Federal Reserve policy designed to curb inflationary pres sures. Still, long-term rates on bonds and mortgages remained virtually flat throughout the year, indicating the confidence of investors that inflation expectations could be moderated over the long run by effective policy measures. The Federal Reserve operated during the year to encourage continued eco nomic expansion while discouraging the development of new inflationary pressures. This required aggressive ac tion at times, such as on several occa sions when the money supply showed signs of over -rapid growth, or when foreign -exchange markets reacted in a disorderly fashion to the depreciating dollar. The effectiveness of policy measures could be seen in the fourth John J. Balles Joseph F. Alibrandi 2 quarter's reduced growth of the mone tary aggregates, and in the continued success of the markets in financing an upsurge of credit demands. The vast regional economy served by the Federal Reserve Ban k of San Francisco exh ibited all of the pressure symptoms evident elsewhere-and t hen some . T he pa ce of expansion was significantly faster in the West than in the rest of the nation, following a pattern set early in the decade. For example, Western commercial banks outpaced other banks wit h a 14-per cent gain in loans and investments, to a year-end total of $130 billion. This region experienced a phenomenal growth in rea l-estate financing, a surge in consumer borrowing, and strong credit demands from smaller bus inesses. The San Francisco Reserve Bank met the needs of a growing Western econo my by providing an expanded amount of Reserve Bank services during 1977. This growth in volumes processed and services provided normally should generate sharp increases in costs, yet costs were offset to a significa nt degree t hroug h gains in efficiency . Mention need on ly be made of th e fact that this Bank continued to be one of the lead ers of the Federa l Reserve System in t he productivity of check processing, currency processing, and other major activities. The ground was laid for further effi ciencies with the continued implemen tat ion of the Bank's long -range automation plan, which in 1977 brought about the standardization of all computers t hr oughout the District as a means of stabilizing hardware costs and prov iding commonality be twee n bran ch offices. While providing for t he fut ur e in t his way, t he staff also met the day -in, day-out financ ial needs of the West through the contin ued provision of check, fiscal, coin, currency and other services. Management benefitted greatly during the year from the broad -based exper ience and judgment of the Bank's di rectors at Head Office and fou r branches. The directors not only pro vided guidance on major management decisions and planning goals , but also supplied key information on economic and financial conditions as a support to the formulation of monetary policy. To obtain an even broader range of advice, the Federal Reserve at yea r end expanded the membership of branch-office boards at Portland, Salt Lake City and Seattle, so that each of those boards (like Los Angeles) now has seven members. In the pro cess, the Reserve Bank has obtained greater representation from consumer, labor, services and conservationist groups. We welcome these new members, and we wish to t hank others who complet ed terms as directors during 1977: Charles Raymond Dah l (Chairman and Chief Executive Officer, Crown Zellerbach Corporation) and Carl E. Schroeder (Chairman of the Board, First National Bank of Orange Coun ty) at our San Francisco office; Ray burn S. Dezember (Cha irman of the Board and President, American National Bank of Bakersfield) at Los Angeles; Theodore C. Jacobsen (Part ner, Jacobsen Construction Company) at Salt Lake City; and Thomas Hirai (Grower, Packer and Shipper of Pota toes) at Seattle. Finally, we wish to express our appreciation to our offi cers and staff, whose dedication to the efficiency of Bank operations has en abled us to improve our services to the financial community and to the gener al public. Joseph F. Alibrandi Chairman of the Board John J . Balles President 3 ~m the BOdrdroom The $2-trillion national economy advanced at a good pace duri ng 1977, cont inuing one of the strongest and most prolonged expansions of t he past generation. T otal production of goods and serv ices, in real terms, increased 4.9 pe rcent, and t his second st ra ight larger-t han- normal increase broug ht into play more of the reserves of labor and cap ita l t hat had bee n left unem p loyed by the 1974-75 recessio n. T he job less rate drop ped sha rp ly to t he lowest level of th e past t hree years, and employment increased faster th an in any other year since World War II. The nation st ru ggled wit h a number of d ifficult pr oblems duri ng 1977. T hese included a record deficit in our inter national transactions (along with its coro llary , a substantial depreciati on of the dollar aga inst several other major currencies) , a continued upsur ge in energy costs, a cost squeeze and weak ened markets in agr iculture and ot her basic ind ustries , a severe stock-market decline, and a continued sluggish ness of business pro fits and business investment spending. Underlying most of these other difficulties was t he ominous prob lem of inflation, wh ich continued to underm ine t he nati on's economic health. Deceleration Repeating the 1976 pattern , real GNP increased at a n outsized rate in t he first quarter of 1977, but th en slowed perceptibly in later quarters of the year. This first-quarter surge reflected the concentration in t hat period of t he inventory restocking needed after a surprisingly strong Ch ristmas season, as well as substantial business and consumer buy ing of autos in t he wake of a late -1976 auto st rike. T he early year inventory build -up, followed by 4 moderate gains in later quarters , thus tended to dominate th e overall pattern of acti vity dur ing the yea r, ju st as had happened in 1976. But in t he four t h quarte r, real fina l sa les-all GN P compone nts except inventories-rose to th e highest level of the past five years, aga in du e to heavy Christ mas buying. Consumer expe ndit ures for autos and housin g helped explain 1977's st rong performa nce, but t he pac e de celer ated in both cases (espe cially au to s) over t he course of t he yea r. Fede ral defic it sp end ing, in the form of a $45-billion defic it in fiscal 1977, aga in pr ovided stim ulus for th e economy, alth ough its st imulative impact was blun ted by lar ge budgetary surpluses at the state and local level. Business spe nding for new plant and equipme nt meanwhile grew at a steady yet gene ra lly un satis facto ry pace, esp ecially since much of t he spe ndi ng-suc h as for polluti on cont rol equipment-failed to meet the expans ion needs of the econ omy. Moreover, in view of t he connection between pet roleu m imports an d t he deteriorating merchandise -trade bal ance, bu sin ess investm ent appeared ur gen tl y need ed to increase pr odu c ti on of ene rgy from do mestic sou rces and to make facto ries more en ergy efficient. Ind ustria l production, wit h a solid 5.6 percent gain over t he yea r, fina lly ex ceeded the earlier peak achi eved on t he eve of the steep 1974-75 recession . P roduct ion increased apprecia bly for construction supp lies, business equip men t, a nd furnit ur e a nd a pp lia nces. Wit h fue l impo rts risin g, dome st ic production of ene rgy materials re main ed almost flat-despite increases in energy prices an d in oil- and gas well dri lling activ ity. P rod uctio n of defe nse a nd space eq uipment also rose only modestl y, cont inuing its post Viet na m pa t tern of sluggish growth. Jobs and prices The number of persons with jobs in creased by 4.1 million over the course of the year-the largest increase of the past generation. Over the same period, the proportion of the labor force with out work dropped from 7.8 percent to 6.4 percent-the lowest level since late 1974. Growing labor-market pressures could also be measured by the fact that the volume of help -wanted adver tising jumped one -third over the course of the year, and by the fact that a record 58 percent of the working-age population held jobs at year-end. Accord ing to that standard, the nation could be judged closer to "full employ ment" than in any of the other years of the past two decades which boasted lower jobless rates. The inflation picture worsened in 1977 with a 5.6-percent rise in the GNP price index, compared with a 5.3-per cent increase the previous year. Part of the problem could be traced to last winter's disruption of food and energy supplies, caused by the Eastern freeze and t he Western drought. Part of the problem could be attributed to cost push pressures, which arose as labor productivity gains lagged considerably behind the wage increases recorded in new labor contracts-which in turn reflected the high rates of past and expected inflat ion. More bas ically, the worsening in the price situation reflected the continuation of heavy Federal deficit spending, as well as the related difficulty of reducing money supply growth to levels compatible with long -run price stability. September on, the dollar declined steeply and steadily against almost all major currencies except the Canadian dollar-ll percent against the Ger man mark, the Japanese yen, and the British pound, and even more against the Swiss franc. The situation then stabilized in earl v 1978, when the Fed eral Reserve and-the Treasury under took support operations in the foreign exchange market. The steeply falling dollar could be attributed in part to the rapid deterio ration in the U.S. merchandise-trade balance, which shifted from a $9-bil lion surplus in 1975 to a $6-billion deficit in 1976 and then finally to a $27-billion deficit in 1977. Imports of petroleum and products increased 70 percent over that two -year period, be cause of sluggish domestic production and a significant recovery in domestic demand. Imports of other products jumped 48 percent, again reflecting the pace of the nation 's business ex pansion. In contrast, U.S. exports rose only 14 percent above the 1975 level, as overseas economies suffered from sluggish growth rates which led to weak demand for U.S. products. For several years, this trade imbalance was offset by substantial capital inflows, associated with the high degree of for eign confidence in U.S. political and economic stability-including its price stability. But that asset demand for dollars suddenly declined in late 1977 as market sentiment shifted against the U.S. currency, perhaps reflecting an expectation of worsening inflation in this country. Dollar problems International problems aggravated the nation's domestic problems late in 1977. Throughout most of the year (except July), the dollar remained fair ly stable in relation to a t rade-weigh t ed basket of currencies. But from late Perc ent Change _ 12 -8 Prices -4 -0 --2 19 1 7 1976 19 7 5 1974 1973 1972 1971 1970 Economy scores strong gain in output, but inflation picture worsens somewhat 5 Perce nt Expanding credit Commercial-bank credit helped fi nance the strong business expansion by rising 10.4 percent, considerably more than in the preceding year. In line with the normal pattern of a ma ture expansion, the loan share rose from 66 percent to 90 percent of the overall credit gain over the year. Busi ness borrowing recovered (at least out side the large money-center banks) but stronger consumer borrowing for home mortgages and instalment buying accounted for most of the 14 percent bank -loan increase. Banks red uced the portfolios of Treasury securities which they had built up for liquidity purposes in the earlier stages of the expansion, but they offset those reductions by expanding purchases of "other" securities, indicating portfolio managers' growing confidence in the state of the municipal-securi ties mar ket. Banks also recorded shifts in their sources of funds, again reflecting the normal pattern of a mature expansion. As market interest rates increased, smaller amounts of funds flowed into those deposit categories affected by rate ceilings, such as passbook savings and small time deposits, while much larger amounts flowed into large nego tiable time certificates. - 12 - 4 Tr easu ry Bills - 0 1977 1976 long -term financ ing needs or to refi- . nance short-term debt through the bond market helped exp lain the slug gishness of business -loan demand at money-center banks, although other factors were also involved, such as higher corporate profits, good cash flow and accessibility to the comm er cial -paper market. Financial markets generally exhibited the same signs of strength visible in bank lending activity. The U.S. Treas ury again was a major factor in the market because of continued deficit spending, and again relied on interme diate and long-term securities to meet its heavy financing needs. The munici pal-securities market far surpassed its 1976 performance. Domestic corpora tions meanwhile lagged only slightly behind the record bond-financing pace of the two previous years. The ability of large corporations to meet their Long-term interest rates meanwhile showed little movement after an ea rly year rise, in spite of the heavy volume of financ ing in t he cap ita l ma rkets . Indeed, yields on municipal bonds de clined throughout the year, because of a very strong demand for tax exempts as well as the improved financia l con dition of state and local governments. 1975 1974 1973 1972 1971 1970 Short-term interest rates rise sharply, but long-term rates remain fairly stable 6 Rising interest rate s Short-term interest rates rose about two full percentage points during 1977-reflecting the strength of busi ness activity as well as some firming of monetary policy-and then rose fur ther in early 1978 in response to the turbulence in foreign-exchange mar kets. In the four t h quarter, heavy foreign purchases of Treasury bills helped to br ing the bill rate consider ab ly below t he rate on other money market instruments. Banks increased t heir prime business -loan ra te seven times between May 1977 and January 1978-altogether from 6 1/ 4 to 8 per cent-but they experienced even greater increases in t he cost of suc h funds as large negotiable CD's and Federal funds, and the result was a nar rowing of t he hitherto-wide spread between what banks earned on their assets and what they paid for funds. Policy problems T he Federal Reserve's policy postur e during 1977 was desig ne d to encoura ge continued economic expa nsion while restraining inflatio nary pr essur es. T he Fed's task was aggravated, however , by several bu lges in the money sup ply whic h occurred in Apr il, July and October. The narrowly-defi ned mone y supply, M " increased 7.4 percent over th e course of t he yea r, while the broader M 2 aggrega te rose by 9.6 pe r cent-in t he first case exceeding, and in the second case approaching, t he upper lim its of t he money -growth ra nges established by t he Fe deral Ope n Market Committee. (M, equals currency plus bank dem and dep osits, and M 2 equals M, plus ti me deposits except large CD's.) In t he November December period, however, the growth rates slac kened for both monetar y aggregates, a nd once aga in fell wit hin prescribed target ran ges. The Federal Reserve raised its dis count rate for member-bank bor row ing twice duri ng 1977 (in August and Octob er ), lar gely to bring it into line wit h earlier increases in mo ney ma rke t rates. But the central ban k then raised the rate aga in in ea rly 1978, from 6 to 6 ljz percent, as part of t he st rategy to ste m the decline in th e val ue of t he do llar. Divergent loan growth Ban k-credit growth slacken ed as mon etary policy firmed in the lat ter par t of the year, but the $82-b illion increase st ill outpaced t he earli er (1973) record by a considerab le ma rgin. Busi ness loa ns increased 13 percent, com pared wit h the 2 1/ 2 percen t gain of t he pre ced ing year. The stre ngt h in t his cate gory again was more eviden t at regiona l ban ks t ha n at the large mon ey-center ban ks, whose la rge corpo rate customers conti nued to find amp le fi nancing outside the banking system. T he strongest loan demands came from t he household sector, reflecting growth in rea l household incomes and t he increased willingness of consumers to ass ume more debt to satisfy reces sion-accumulated needs for hous ing and consumer goods . Mortgage credit and consumer instalment credit both expanded about 17 percent, t he lar gest increases occurring in such categories as auto loan s an d credit -card debt. Bank earnings improved considerably during 1977. One major reason was the large increase in the volume of earning assets (especially loans), wh ich helped expand ne t interest income despite a narrowing of the sp read between the rates banks earned and t he rates they paid for funds. Income also improved beca use of the slacken ing of certain costs attributable to the earlier reces sion, evide nced by smalle r provis ions for loan- loss reserves and a reduced volume of non -accrual loans (that is, loa ns on which interest cur rently is not being pa id) . On th e ot her hand , earnings performance suffered be cause of t he shift from less-expensive to mor e-expensive sources of funds . Sav ings-deposit inflows slowed from t he record $41-bill ion increase of 1976 to only $16 billion in 1977-with a minima l increase in t he four t h quarter of t he year-while CD funds , which a re not affected by rate ceilings, in creased $11 billion after a $19-billion run-off t he yea r before . Retail-oriented banks, wit h their st rong repr esen tati on in cons umer financia l ma rkets , aga in pos ted a stronger earnings performan ce than wholesa le banks, with the latter's clos er t ies to the slow-growing corporate loan mark et . Retai l ba nks also showed greater abi lity to keep th eir costs in line beca use of t heir depen dence on less-costly sav ings depos its, whi le wholesa le banks incurred large cost increases as they expanded the ir issu a nce of negotia ble CD's. Change (S BIllions) 66 . 1 Consumer Loans Real Estate Loans Change (S Bill ions) 30.3 _ - - ...:........, Consumer loans Re E6 • Loenll Business l oans to 1976 1977 Bu siness lo an s rise, a lt hough st r onge st demands come from hou sehold sector 7 \\kstern I)SlneSS • Percent Change The Western economy, despite drought and farm recess ion, expanded at an even faster pace than the rest of the nation during 1977. (This region, which is served by the San Francisco Federal Reserve District, includes all the n ine sta tes west of the Continental Div ide.) Family incomes outpaced inflati on by a substant ial ma rgin; employment increased at one of the fastest rates of recent decades; and these developments helped stimulate regional production and sales while reducing the ranks of the unemployed. Population growth stimulated this economic growth, as 600,000 new resi dents boosted the regional total to 34.3 million in 1977. This phenomenon re presented the continuation of a long term westward shift of the nation's population-a shift which has become especially evident during the present decade. Between 1970 and 1977, mi gration accounted for almost half of the region's total population gain of 3.7 mill ion, creating double-digit growth in all except the two largest Western states (California and Wash ington). The fastest growers-Arizona, Nevada and Alaska-all reported gains of 29 percent or mo re. But slower -growing California, despite a near-cessation of migration during t he aero spa ce-re lated recess ion of the ear ly 1970's, still added more than 1.9 mill ion people between 1970 and 1977 to widen its lead as the nation's largest state-and one-fifth of that increase occur red in 1977 alone. -5 West - 4 - 3 - 2 - 1 Other U.S . - 0 - - 1 --2 1977 1976 19 7 5 19 74 1973 1972 1971 1970 Employment expansion even stronger in We st th an in rest of nation 8 Regional job boom Civilian employment in th is nine -state / area increased almost 4 1 2 percent for the second straight year-to a new peak of 14.3 million. T he pac e of ex pansion was signi ficantly faster in the West t han in th e rest of th e nati on, following a pattern set ea rly in t he decade. Ma nu fact ur ing employme nt finally returned to prerecession levels, and construction employment in creased more than 10 percent as bu ild ing activity soared throughout th e region . Jobs also continued to open up in trade, in serv ices and (to a lesse r extent) in government; those three sectors accounted for almost 65 percent of all payroll employment, compared to 59 percent a decade ago. Reflecting this active job market, the average jobless rate dropped from 9.0 percent in 1976 to 7.6 percent in 1977. By year-end, the rate was down to about 7.0 percent. The improvement was especially noticeable in the large Pacific Coast states. Indeed , the job ma rket worsened significantly only in Alaska, because of the completion of the oil pipeline. Foreign t rade remained active at Wes t Coast ports, with abo ut an ll -percent gain in total volume, but most of th e traffic was in-coming rath er t han out going. Imports increased 20 percent to about $29.6 billion, encompassing all the oil, raw materials, and industrial and consumer goods necessary to sup ply the expanding Western economy. In contrast, exports remained almost stable at about $20.6 billion, partly because of the sluggish growth of most foreign economies, and partly because of the oversupply conditions which confronted Western producers of food and other products in the intensely competitive markets overseas. Income, trade surge Personal inco me increased more than 11 1/i percent to about $260 billion in 1977. Much of the gain was eaten away by inflation as consumer prices rose almost 7 percent during the year; nonetheless, this left a solid gain of more than 4 1/ 2 percent in rea l income. (However, pr ices rose faster here t han elsewhere for t he t hi rd straight year, probably reflecting th e faste r pace of business activity in the West.) Con sume rs purchased al most 13 percent more goods at ret ail t ha n d uri ng th e preceding year, largely because of boom ing sales of autos an d ot he r dura ble goods . New -car registrations in Californ ia rose almost 35 percen t above the 1976 pace, approaching t he 1973 peak level of sales . State and local govern ments benefit ted from the upsurge in income and sa les and , like their cou nterparts else where, boasted substantial budget sur pluses as a resu lt. California's State government, for example, projected a $3-billion surplus for the comin g fiscal year, in line with a 16-percent increase in spending to $17.4 billio n. But in an election year much of that surplus would probably disappear, allocated to court-mandated programs for school finance reform or to voter-mandated reductions in local property taxes. Farm recession Western farmers and ranchers were beset by falling prices, falling exports, and falling water tables during 1977. With crop receipts declining, total agri cultural sales dropped about one percent to roughly $15 billion-and the decl ine in net income was even steeper because of rising production costs. The drop in farm sales reflected widespread pr ice weakness, broug ht about partly by bumper crops in this country, and partly by a slowdown in demand from overseas customers and an increase in sa les by overseas com petitors. Agricu ltural exports from West Coast ports dropped 22 percent between t he first t hree quarters of 1976 and the comparable period of 1977. The impact of t he farm recession was felt in many rural communities, as farmers curtai led their spending for tractors , t rucks and other pieces of farm equ ipment . Cattle producers' gross incomes rose about 2'/2 percent above a yea r ago, but their net incomes fell as they had to contend with the effects of a second straight year of drought-such as the cost of hay to supplement parched pastures and the cost of water to re plenish dried -up ponds. Crop farmers suffered a 2 112-percent drop in gross incomes, and they too experienced sharp rises in costs. Federal and state agencies cut water de liveries 60 to 75 percent in California's Central Valley , and farmers in that area thus had to spend considerable sums for digging wells and pumping water. Western farmers were troubled not only by drought problems, but also by confusion about the interpretation of the National Reclamation Act of 1902, which governs the greening of 12 mil lion acres throughout the West. In response to a court order involving water rights in the Westlands Water District-a large semi -arid area locat ed on the west side of California's San Percent - 10 -8 -6 -4 - 0 1977 1976 1975 1974 1973 1972 1971 1970 Jobless rate drops faster in West than el sewhere, showing st ronge r expansion 9 .. D ollar s Joaquin Valley-the U.S. Department of the Interior issued proposed regula tions that interpreted the Reclamation Act rather literally. The regulations would have limited the numbe r of acres eligib le for Federal water sup plies to 160 per fami ly member-wi th a limit of 1,280 acres per fami ly hold ing- and als o would have enfo rced strict interpretation of ot her pro vi sions of the 1902 Act. At year's end, however, further lit igat ion delayed im plementation of th e new regulations, and both the national and state ad min istrations began cons idering a ma jor overhaul of the basic legislation, because of fears that a rigid 160-acre limitation could restrict the efficien cies possible under large-scale irrigat ion. -7 The grain farmers of the Northwest were heavily affected by the farm sec tor's multiple ills, for wheat prices reached a five-year low during the summer, while the drought reduced yields and thus the size of crops. Cali fornia rice growers reduced output of that very water-intensive crop by 17 percent, but they benefitted from prices that were higher by half t han a yea r ago. Potato growers st ill overpro duced, alt hough they reduced their ou tp ut modestly below last year's re cord , so that prices continue to slide. In contrast, Arizona and California cotton growers increased acreage 31 percent in response to the tight sup plies and high prices of 1976, on ly to see prices reduced under the pressure of worldw ide overproduction. -6 -5 -4 -3 -2 -1 - ~ Cattle (lb) -0 1977 1976 1975 1974 1973 1972 1971 1970 Weakening f a rm price s reduce receipts of W e stern f armers and ranchers 10 Housing boom A mass ive boom in homebuilding, al though nationwide in scope, was most evident in the Western ma rket, wh ich followed up its 49-perce nt incr ease in 1976 housing starts wit h a furthe r 35 percen t increase in 1977. Speculative activity in th e single-fa mily en d of t he market acce nt ua ted the boom during t he first hal f of t he year , but the speculat ive excesses were gradually wrung out of t he market, with lit tle damage to t he industry. Even so, heavy demand and cost pressures pushed the median pr ice of new homes to $53,400 at midyear-13 percent above the year-ago figure and also 13 percent above the current price of homes elsewhere in t he nation. While single-family housing boomed, the long -depressed multi-family sector of the ma rket began to recover, and industrial and commercial construc tion also expanded. Moreover, future homebuilding plans looked solid, based upon a 30-percent increase in new permit activity during 1977. On t he other hand, savings flows into mortgage-lendi ng institutions dece ler ated in the lat ter part of t he year, as save rs foun d it possi ble to ea rn higher rat es on Treasury bills and oth er mar ket instruments. T hr ift -ind ustry lead ers no nethe less rem ained confident that funds would still be ava ilab le to meet a reco rd level of loan commitments. Here as elsewhere, the housing boom benefitted not only from easy financ ing conditions, but also from t he de mographic fact that more and more families were moving into age brackets which normally provide the bulk of all home buyers. Many of these families included two wage earners , and for that reason were able to pay the sharp ly rising home prices noted above. Be sides, many were able to use the inflation-bloated prices of their former homes to meet the large downpay ments required . All these factors were also present in the national housing market, but the regional boom was accentuated by a vast inflow of mi grants, who came to take advantage of the better climate and more plentiful job opportunities available in the West. Forest problems T he nationwide upsurge in residential construction put heavy pressure on the Western lumber industry, wh ich because of strikes and timber short ages increased production only about 3 percent during the year. Despite some easing of prices during the last few months, softwood lumber prices at year -end remained 63 percent above their late-1974 low. The pulp and pa per segment of the industry showed considerable strength during the early part of the year, but market conditions later weakened as slow overseas de mand led t o stiff competition from foreign prod ucers in both domestic and export markets. Pulp and paper pr ices rose an ave rage 4 percent for the year, but costs rose at an even faster rate, narrowing profit margins for many import a nt items. The forest -products industry showed growing concern about policy ques tions relating to the management and use of National Forests and other publicly -owned forest lands-such as proposals to prohibit timber harvest ing in National Forest lands designat ed as wilderness areas. In th is situation, forest -product firms depen dent upon public lands became in creasingly worried about the cost and avai lability of timber to meet their long-term raw material requirements. Mixed manufacturing Manufacturing production overall expanded at a faster-than-national pace, sparked by considerable strength in aerospace-equipment and other durable-goods manufacturing. (Still, aerospace employment lagged behind its pre -recession level and remained 29 percent be low the Vietnam -War peak.) Military prime -contract awards rose nearly 7 percent during the year ending in June, on the hee ls of sharp gains in the two preceding years, and increased funding for such projects as the cruise missile and the F -15 fighter plane helped keep spending high even after the cancellation of the B-1 bomb er program. Space-agency awards also strengthened during this period, primarily for the space -shuttle pro gram. Meanwhile, foreign and domes tic orders for Boeing jet transports expanded in line with the improved financial position of the world airline industry. Larger military and consum er purchases of electronic products also contributed to the industry's or der flow. Thousands _ 500 - 400 Other W••I Regional steel production continued in the doldrums, reflecting the gradual weakening in demand from consumer goods producers and the continued sluggishness in demand from capital goods manufacturers. The domestic industry's problems were aggravated by the aggressive marketing of foreign producers, who increased their pene tration (from 31 to 34 percent) of the Western market in an expanded effort to sell here what they could not sell in sluggish markets overseas. In fact, 1977 1976 1975 1974 1973 1972 1971 1970 Massive homebuilding boom centered in California and other Western states 11 major regional producers were forced to close a number of small fabricating facilities because of th eir ina bilit v to pass on higher costs in t he face of seve re import competition. The Northwest aluminum indust ry experienced st rong demand bu t was forced to ope rate well below capacity becau se of a drought -related shortag e of hyd ropower- an d in these circu m stances, the industry was able to rais e prices by about 10 per cent over the course of th e year. The copper indus try, in contrast, found itse lf faced with a problem of excess supply, and thus had to cut back mine and refinery output during the secon d half of t he year. Producers boosted the price of refined metal 13 percent in early 1977, when hedge buying against a poss ible strike added a temporary element of strength to the market. Subsequently, they were forced to lower prices by an even greater amount as demand weak ened and inventories continued to accumulate at copper refineries throughout th e world . Rising o il supply Western consumption of petroleum products increased sharply du ring t he yea r, pa rt ly beca use of the industrial needs generated by t he continued business expansion, but also becau se of regional uti lities' increased reliance on fuel oil as a result of natura l-gas and hyd ropower shortages. Refinery output rose nearly 16 percent to meet th is demand . However, the impo rt share of the Western market declined slightly from the 1976 peak of 48 per cent, as regional production of crude oil increased for the first time since 1970, because of the opening of the Alaskan pipeline and the expansion of output at California's Elk Hills Reserve. 12 A $400-million Fede ra l sale of offshore oil an d gas leases in th e Lower Cook Inlet region of Alaska held fort h t he prom ise of new drilling acti vity in t hat area , while t he Adm inistration' s endorsement of the $10-billion Alcan natural-gas pipel ine project for deli vering Nort h Slope gas t hrough Ca nada to markets in the contiguous 48 states brought t hat project a ste p closer to rea lity . Mea nwhile, public a nd privately-owned electric uti lit ies and industrial customers in t he Pacific Northwest pus hed for Congr ess ional legislation to reorganize the region's electric-power system. Through a coordinated program of Federal an d private power development and mar keting, the pla n would help assur e adequate suppl ies of reasonably priced electricity for all powe r users in the Northwest as the area moves from primary reliance on hydro -power to a therma l-electric power bas e. Maturing boom Altogether, 1977 ma rked the second straight year of solid recove ry from t he steep 1974-75 recession, which sug gests that furthe r ga ins may be hard to come by as the regional expansion enters a mor e mature ph ase in 1978. Fr om recen t indicat ions, auto buying an d sing le-fa mily home const ruction the st rongest supports of t he curre nt expansion-may decline from their ea rlier headlong pace. Steel, copper and other bas ic indust ries meanwh ile could remain in the doldru ms, reflect ing the sluggishness of the worldw ide markets in which they operate. Other sectors still could take up the slack, such as apartment, commercial or industrial construction-or defense spending, which is already half again as large as it was five years ago. The farm sit uation also may show some improvement, on the basis of the recent evidence of falling ra in and rising prices. On balance , slower but more sustainable growth may be the most likely outlook-and the best pre scription-for the regional economy in 1978. 1' J ust as the Western region led the nation in economic growth, Western commercial banks outpaced their na t ional counterparts with a faste r expansion of bank cred it and bank lending. T he highlights of the year included a phenomenal growth in real estate financing, a surge in consumer borrowing, and a simi lar acceleration in credi t demand by smaller busi nesses. Tota l loans and inve stments reac hed $130 billion at year-end, for a $15.7-billion (14 percent) increase. This increase, which surpassed even the record expansion of 1973, was due almost entirely to a $14.8-billion (17 percent) upsurge in loans. Yet despite their massive lending gains and their already strong liquidity positions, Western banks added nearly a billion dolla rs to t heir securities portfolios. Like other banks, t hey reduced t heir holdings of short-term T reasury secu rit ies but expanded their portfolios of short-term municipals. Diverse lending Bus iness loans rose more than 12 per cent duri ng the year, but almost all of t he increase took place outside the large metropolitan centers. Still, large Western banks were ab le to take advant age of their widespread branch struct ures to channel funds that might have gone into bus iness loans into increased mortgage and cons umer lendi ng. Business-loan growth picked up somew hat at the branch systems' metropolitan offices during the second half of the year, but large corporations continued to limit their loan demands because they had ot her sources of funds available (frequently at lower rates) in the commercial-paper and cap ita l markets. Smaller banks as well as the regional offices of larger ba nks meanwhi le met the expanded loan demand from th e small and "midd le market" firms t hat could not gain ac cess to the alternative sources of funds available to larger corporations . Busi ness firms engaged in metal fabrica tion, chemical manufacturing, wholesale trade and construction sharply increased their reliance on bank borrowing. Western banks broke all records for real-estate finan cing , reflecting the soa ring demand for new and upgraded housing facilities. Mortgage loans increased 29 percent-an especially large gain for such a mature stage of the business expansion. Mortgages ac counted for one -third of all bank loans at year-end, replacing business loans as the largest single loan category. Part of the upsur ge represented aggressive bank marketing of second mortgages, which permitted home owners to borrow against the sharply increased value of t heir equity as home pr ices escalated. \Xkstern Bdnking Pe rcent C hange 28 .5 Consumer borrowing also increased at a headlong pace, reflecting consumer willingness to take on more debt in an expanding economy. As auto sales strengthened in the early part of the year, auto financing accelerated. Later in the year , as spending increased for other consumer goods and services, banks recorded dramatic gains under credit-card and check -credit plans. Increased deposits Total deposits at District commercial banks increased $15.0 billion (12 per cent) , providing a major part of the funds necessary for the record expan sion in bank cred it. Western banks recorded greater -than -national gains both for private demand deposits and for time and savings deposits, again reflecting t he more rapid expansion of t he regional economy. Savings depos its, the major source of funds during th e 1975- 76 period, peaked at the end of the first quarter and then began to decline, as households and domestic government un its sh ifted thei r funds to money-market inst ruments offer ing higher rates. Throughout t he year, and especially during the final quarter, 14 .6 Percent Cha nge West Other West Other U.S . U.S. Business Loans Mortgage Loans Stronger regional loan growth due mostly to boom in mortgage sector 13 banks began to turn again to negotia ble CD 's as a source of funds, because of the lack of ceiling rates on such instruments. Required reserves of Federal Reserve member banks averaged $441 mill ion more in 1977 than in 1976. This re flected not only an increase in total deposits, but also a sh ift in deposit composition towards demand deposits and other time deposits, which are affected by h igher marginal reserve requirements than savings deposits. Percen t Change Perce nt Change / 13.4 6.5 West Othe r U.S. 0 0 West Other U.S. -2.9 -, Ba nks made rather limit ed use of the Federa l Reserve Bank of San Francis co's disco unt facil ities d uring the first half of th e year, because of their strong liquidity positions and the avai labi lity of interbank loans through th e Federal- funds ma rke t. But bor rowings later rose significantly as the d iscount rate (despite several in creases) lagged substantially behind t he fast -rising Fed -funds rate. For the year as a whole, borrowings averaged $37 million a day-compared to only $5 million in 1976. In contrast, net Fed-funds purchases (borrowings) by the largest Western banks dropped slight ly below year -ago levels , on a daily average bas is. Stronger e a r n in gs The rapid expansion in the volume of ea rning assets, primari ly loans , he lped to boost regional banks' earnings d uring 1977. As in the two preceding years , Western banks genera lly record ed a stronge r earnings performa nce tha n th eir nati ona l coun terparts, partly because of their relat ively larger volume of mortgage and consumer loan s, wh ich boast wide interest -ra te spreads over the cost of bank funds . Again, regional ban ks be nefitted more t han ot hers from their close relat ion ship wit h sma ll and medi um-sized - 1 1.3 r-, U.S. Govt. Secu rities Other Securities Banks reduce Treasury portfolios while buying other securities 14 business firms , whose credit needs expanded more than that of large corporate borrowers. Western banks, like their national counterparts, also benefitted from reductions in loa n-loss provisions and in non -accr ual loans. For some of the larger banks, foreign operations continued to account for a significant portion of earnings. Yet in t he West as elsewhere, intense competition among banks placed downward pressure on the terms of business lending, including compen sating -balance req uirements. Pressure on profits also arose from the cost side because of rising market rates, espe cially since banks increased the ir issu an ce of large CD 's when the inflow of less -expensive savings deposits slackened. Mixed prospects The prospects for Western banking appear fairly solid at this early stage of 1978, although not quite so bright as a year ago. Less strength may be provided by the twin supports of the 1977 loan expansion-mortgage and consumer lending- in the one case because of the slowdown of savings funds that would normally flow into home mortgages , and in the other case because of the massive size of the debt burden already assumed by consum ers . But the likelihood of further strength in bus iness activity, especial ly in the context of tighten ing finan cial markets, suggests that many bus iness firms will increase t heir reli ance on the banks for financ ing plant , equipment and invent ories. Banks generally may experience a rising volume of loans at higher rates, wh ich should help offset a possib le narrowing of the "spread" as interest rates on fund s and other costs increase. West ern banks in particular may aga in profit from a faster -than -national expansio n of business activ ity, and hence from a broader range of lending opportunities t han their national counterparts can expect. iii' The Federal Reserve Bank of San Francisco d ur ing 1977 provided an expanded pac kage of central-banking services- such as chec ks, coin, curren cy, fisca l and electronic funds trans fers-fo r a regio na l economy wh ich cont in ued t o grow fas te r tha n t he rest of t he na tion . T he Twelfth District, with its five location s in Sa n Fra ncis co, Los Angeles, Portland , Sa lt La ke City and Seattle, is t he largest Federa l Rese rve District in terms of both pop ulation and geograph ic size. It includes t he states of Alaska, Arizona, Ca lifor nia, Hawaii (wit h Guam a nd Samoa), Idaho, Nevada, Oregon, Utah and Was hington, wit h 34 million people as well as 541 ban ks and 6,808 banking offices. The sco pe of ope rations in 1977 re flect ed th e vast size of t he Ba nk 's service area. Fo r exa mp le, Ba nk staff handled over 1.3 billion paper checks, not to mention 1.8 billion coins and over 1.1 billi on pieces of currency. At the same time, the Bank conti nu ed to extend its electronic payments capa bility, through such means as auto mat ed clearing houses, Government d irect -deposit programs, and t he Fed eral Rese rve wire -tra nsfe r network . T he San Francisco Rese rve Bank, along wit h ot her compone nts of the Federal Rese rve Syste m, helped ma in ta in a continued flow of fun ds t hro ugh th e nati on 's payments system du rin g th e New Yor k blackou t last summer, demonstrat ing t he efficacy of eme r gency processi ng proce d ures for ha n dling the checks a nd electron ic payments normally destined for New York. During the year, 3 new state member banks, 3 national banks, 27 state nonmember banks, and 1 trust com pany were organized in the District. The number of Federal Reserve mem ber banks increased from 144 to 148 banks , and the number of member bank offices increased 2 percent to 4,976 offices. T his Bank th us regis tered a net gain in membership in the face of an unfavorable national trend. In th is connection, the Bank's direc tors played an important role in deve l op ing new solutions for the member ship problem through the formation of a special d irectors' Committee on Sys tem Membership. The Committee ini tiated a comprehensive opinion survey of District member banks, which ad d ressed such key issues as NOW ac counts, interest payments on rese rves, a nd the q uality of Federal Reserve Bank services. To provide improved services to its commercial-bank ing publ ic, the Bank reorganized its Bank Relations staff as a separate department in 1977. This department became responsible for ana lyzing various types of service problems, planning new bank-rela tions programs for the Distr ict , and providing staff support to the District wide effor t in th is area . As a means of inf orming member and nonmember ba nks ab out t he wide range of Federal Reserve serv ices, the unit conducted meetings and sem inars for bankers, cost -of-members hip surveys, and va rious technical surveys-includ ing a Functional Cost Analys is program which provided member banks with detailed infor mat ion on the costs incurred for var ious functions by their peer group of competitors. 15 Federal Reserve Bank of San Francisco Organization Chart January 1, 1978 Senior Vice President District Departments Kent O. Sims District Departments Admin. Officer Adelle Foley \ I Vice President Bank Examinations Eugene A. Thomas Vice President Bank Relations Robert C. Dietz Vice President Super., Reg., & Credit Vice President & Director of Research Michael W. Keran Vice President Statistical & Data Servo Wilhelmine von Turk Henry B..Jamison Director of Economic Analysis Joseph R. Bisignano Director BUC Regulation Harry W. Green Asst. Vice Pres. & Economist Hang-Sheng Cheng Asst. Vice Pres. Bank Relations Robert A. Johnston Examining Officer Commercial-SF Wayne L. Rickards Examining Officer International-SF Rodney E. Reid Credit & Consumer Affairs Officer W. Gordon Smith Research Officer Pete r Hsieh Director of Public Information William M. Burke Asst. Vice Pres. & Economist John H. Beebe Research Officer Herbert R. Runyon Examining Officers Merle E. Borchert Commercial-LA G. Ross Varoz Commercial-SLC San Francisco Bra Senior Vice President San Francisco Wesley G. DeVries Vice President Analysis-Control Vice President Operations" Warren H. Hutchins Claude Woessner Asst. Vice Pres. Personnel Michael J. Murray Asst. Vice Pres. Fiscal Roy A. Remedios Asst. Robe Cash Officer Benjamin B. Gillespie ;t Senior Vice President Seattle Gerald R. Kelly F Seattle Asst. Vice Pres. Adm in. Services Kenneth L. Peterson "Temporary Special Assignment-Quality Assurance Implementation Program 16 Asst. Vice Pres. Operations E. Ronald Liggett Analysis and Control Officer A. Richard Tidwell AI A, Ma: Board Of Directors President John .J. Balles Assistant General Auditors Beverly .J. Adams Bruce H. Thompson General Auditor .James F. Leyman Ombudsman Jane W. Langhorne First Vice President John B. Williams Secretary's Office Corporate Staff Senior Vice President Computer Services Richard T. Griffith Senior Vice President Corporate Staff .Iohn J . Carson Senior Vice President Secretary's Office Donald V. Masten Facilities Planning Staff Vice President & General Counsel Louis E. Reilly Vice President Budget & Control Thomas E. Judge Vice President Facilities Planning Rix Maurer, Jr. Vice President Personnel Walter G. Woodbury Director Facilities Planning Oren L. Christensen Assoc. General Counsel William L. Cooper Assl. Vice Pres. Facilit. Planning William K. Ginter lranch Operations Branch Operations Director H. Peter Franzel Director Computer Systems Kenneth A. Grant Asst. Vice Pres. Corp. Planning William S. Thurlow Director Computer Operations Hector M. Martin Assl. Vice Pres. Computer Support Services William V. Ott Asst. Vice Pres. Legis. Analyst Verle B. .Johnston District Security Director George P. Galloway Asst. Vice Pres. System Coord. Elwood E. Bernstein .Los Angeles Senior Vice President Los Angeles Richard C. Dunn Vice President Operations James M. Davis Asst. Vice Pres. Analysis-Control John R. Cola ~ s st. Vice Pres. Robert H. Colfelt Admin. Services Officer Jon G. Chasse . spie Portland Vice President Portland Angelo S. Carella Asst. Vice Pres. Admin. Services Maynard C. Petersen Asst. Vice Pres. Richard L. Rasmussen Cash Officer Brent M. Duxbury Salt Lake City Assl. Vice Pres. Analysis-Control H. William Pennington Fiscal Officer Patsy L. Haynes Employee Relations Officer Raymond E. Kriese . Jr. Vice President Salt Lake City A. Grant Holman Asst. Vice Pres. Operations Don W. Sheets Analysis and Control Officer Douglas O. Knudsen Operations Officer M. Timothy Carr 17 Admin. Services Officer .J. W. Williams ..Jr . Supervision activities The number of ba nk hold ing compan ies supervised by t he San Fra ncisco Res erve Bank increased slightly , fro m 71 to 74, over the course of t he year. The Ba n k's staff analyzed 160 applica tions to ini tia te or expa nd hold ing company activit ies-up fro m 107 the previous year . The Federal Reserve continue d its policy of perm itting orderly growth of holding compan ies by approving applications whic h will permit sou nd ly fina nce d expans ion of financia l serv ices , whi le improving compet it ion and meeting the needs of t he public. To stre ngthe n its supe rvi sion of ba nk holding com panies an d t he ir subsidiaries, the Rese rve Ba nk began conduct ing an nual inspecti ons of all suc h companies registered in t he District , and provided holding company managements wit h forma l reports of t he cond it ions foun d in these examinations. T he Board of Governors subseq uently has extended t he esse ntial fea t ur es of this app roac h to hold ing company supe rvis ion na t ionwide for larger bank ho lding com panies an d/ or their cred it-gra nt ing su bsidiaries. T he Reserve Ba nk discharged its in ternational responsi biliti es by super vising both the intern at ional d ivisions of state -cha rtered member ba nk s and th e 23 Edge Act Corpora ti ons loca te d in t he District. (An Edge corporation is a ba nk hold ing-com pany subs idiary which is authorized to engage in fore ign-ban king activities from an of fice loca ted outside the state in which its pa rent is loca ted. ) T he Bank's staff analyzed and processed 45 applica t ions involving new or expanded overseas operations by entit ies un der its supe rvision. Ba nk exa mi ne rs con du cted exami nations in Europe of one branch office and severa l subs id iaries of mem ber banks and Edg e Act corporations. Staff membe rs also par t icipated in a pilot progra m, under th e Sys te m Com mittee on Fore ign Le nd ing, des igned to test a pr oposed new a p proach for eva luating foreign credits. Management Committee John J. Ba lles, President, (seated , left ) John B. Williams, First Vice President (seated , right) Ke nt O. S ims, Senior Vice Pres ide nt (stand ing, left ) John J . Carson, Sen ior Vice Pres ident (standing , right) 18 T he Bank's Financial Analysis Un it continued to monitor current bank and hold ing -company developments between on -site examinations, as a means of detecting dete riorating t rends a nd prob lems at an early stage. To facilita te this activity, the Bank implemented a comp ute r-based su r veilla nce sys te m during t he first q uar ter of 1977. Th is sys te m was designed to ut ilize current data reports which t he Reserve Ban k collects for a var iet y of other purposes, and it pro ved capa ble of rapidly screening these data for evidence of problem situations. The early identification of the need for a complete yet flexible system of this type pe rmitted this Reserve Bank to respond immediately when the Board of Governors mandated the de velop ment and implementation of a System -wide "min imal surveillance system." DeVries Consumer protection The Bank's Consumer Affairs Unit dramatica lly increased its scope of operations d uring 1977, largely in response to a new program instituted by t he Boa rd of Governors to achieve broad -based com pliance with consum er-pro tec t ion statu tes a nd regula t ions t hrougho ut t he banking ind ust ry. Conseq uen tly, th e Un it added a team of spe cially t rain ed exam iners to con d uct consumer-complia nce examina t ions of all state member banks, and in add it ion, it offered an educational and advisory service to all member banks in th e District. The advisory ser vice, provided on site and tailored to each individ ua l ba nk 's needs, ranges from a brief meeting with commercial -bank personnel to a complete review of a bank's form s, policies, instruction manuals and other materials affect ed by consumer -banking laws and regulations . Dunn Kelly Carella Holman Branch Mana g ers Wesl ey G. DeV ries, Se nior Vice Presiden t, Sa n Francisco Richard C. Du nn, Sen ior Vice P reside nt, Los Angeles Gerald R. Kelly, Se nior Vice P resident , Seattle Ange lo S. Ca rella, Vice Preside nt, P ort land A. Grant Holm an , Vice P res ident, Sal t La ke City 19 Foll owing a revision of Regulation B (Equal Credit Opportunity) and an amendment to Regulation Z imple menting the Consumer Leasing Act, the Consumer Affairs Uni t conducted seminars on the new regulations in all major Western cit ies. The Unit ha n dled nearly 500 consumer complaints against commercial banks, and also responded to over 1,500 inquiries concerning vari ous facets of the con sumer-credit laws and regu lations . 1977 6.30 S Trillions 19 76 standardizing cur rent branch comput er programs until they are replaced with the centralized systems now be ing developed. The cornerstone of the long-range automation plan is the cen tralization of majo r systems at th e San Francisco Data Center, wit h serv ice to the branches via teleprocessi ng facili ties . Although only in t he second year of t he plan , all efforts to date have been very succe ssful and implemented in a timely manner. Internal improvements In its internal operat ions, the Bank implemented a Planning and Control System (PACS) at the beginning of 1977 to prov ide an improved approach to budgeting and expense reporting. This accounting system, which was introduced concurrently throughout the entire Federal Reserve System, established a service st ruct ur e for clas sification of budgeted and actual ex penses. It also introduced the concept of full-costing as well as improved measures of bank performance. At the sam e time, the Bank installed a revised resp onsibility accounting and budgeting system, designed to improve accountability for results and reduce the clerical effort below what was required under the former accounting system. Payments activities In chec k-processing activities , Bank staff handled over 1.3 billion paper checks during the year. This repre sented a sharp increase of 11 percent in commercial-check deposits. The increase was much higher than exper ienced elsewhere in the country, and resulted mainly from improvements in transportation arrangements an d a shift in the use of correspondent banking channels. Almost all of the checks Rowed through the Bank's net work of check-processing centers, which mak e possible one-day check clearing as well as lower check handling costs for commercial banks. Check performance benefitted cons id erably from the Bank's installation of the most advanced computer-software systems and "reader/sorter" mac h ines , which are comp uter-driven docu me nt processors for handling checks . The Bank also made plans to reduce costs by "truncating" Treasury checks; that is, by sh ipping magnetic tapes and microfilm copies of checks, instead of the original paper checks in bulk, to the Treasury computer operations center. The Computer Services Group , in ac cordance with its long -range (1977-81 ) automation plan, adopted the previous year , reorganized the delivery of auto mation ser vices within the entire San Francisco District. All computers throughout the District were st an dardized to sta bilize hardware costs and to pr ovide commonality between branch offices, which will allow for District member banks send $6.3 trillion through Fed's wire-transfer system 20 In electronic payments activities, Dis trict member banks settled $6.3 tril lion through the Federal Reserve wire tr ansfer system- a 16-percent increase over 1976. The Bank institut ed a new computer-interface facili ty which enables member banks to con nect their computers directly to this nationwide Fed Wire network. By pr o vid ing this direct link, the Federal Reserve made it possible for banks to conduct increasingly sophisticated cas h-ma nagement systems for them selves and their customers. In auto mated clearing house (ACH ) activities , District banks cleared 2.2 mill ion com mercial items and 15.2 million govern ment items during the year. The number of government items almost quadrupled , reflecting t he expansion of the direct deposit of checks (such as social -security checks) under var ious Federal recurring-payment programs. The Bank's four offices outside San Fra ncisco made not able progress in 1977 in a nu mber of different areas. For exa mp le, Los Angeles, P ortland and Seattle installed new check sys tems dur ing th e year, an d Seattle an d Salt Lake City brought new automat ed clearinghouse operations on stream. This District has tak en a pos ition of leadersh ip in interconn ecting regional ACH centers. T he San Francisco Bran ch has coordi nated the Interre gional P ilot Program which switches ACH items between terri tories. Salt Lake Cit y was especially su ccessful in bringing new memb er banks into t he System, wit h 4 ban ks from that area ad opting mem bershi p. And the Port land office achieved nati on wide pub licity with its success in p ersuading large retail chai ns an d supermarkets to increase util izati on of the two-dollar bill in making cha nge. Despite the increase in th e use of checks and electronic transfers, the Bank continued to handle ma ssive am ounts of coin and currency, receiv ing and counting 1.8 billion coins and 1.1 billion piece s of cur rency during the year . As for the bottom line, t he San Fran cisco Reserve Bank cont inued among th e leaders in t he Federal Reserve System in output per hour in both check an d currency services-two a reas which accou nt for more than 40 per cent of bra nch -operating expenses. Where man agem ent unco vered oper at ing proble ms, it moved quickly to reme dy th em, espec ially through a new Qua lity Assurance P rogram. This program was des igned to identi fy and ana lyze t he causes of any cur ren t problems, to deve lop means for permanently correcting identified defici encies, and to dev elop a syste m for spo tting pote nt ial pro blems and moni tor ing ongoing performance. • Greater efficiencies In its role as fiscal agent for the U.S. government, the Res erve Bank contin ued to handle substantial am ounts of paper-in the form of savings bonds, marketable Treasury securities, and food stamps-while achieving new ef ficiencies through computer handling of securities. The Federal Reserv e and the Treasury Department colla borated during t he year to introduce a "boo k entry" system for Treasury bills. Un der this system, T rea sur y secur it ies are recorded in the accounts of banks or other financial institutions acting as custodians for investors. Instead of a n engraved certificate, the purcha ser receives a receipt as evidence of purchase. Millio ns - 2,000 - 1,500 - 1,000 - 700 -- 0 19 77 19 76 1975 1974 1973 1972 1971 1970 Fed handles 1.3 billion checks plus massive amounts of currency 21 Summary of Operations Value (m illions) 1977 1976 Number (thousands) 1977 1976 Currency and Coin 10,995 265 $ 9,976 206 1,140,466 1,785,684 1,113,966* 1,888,624 ** 452,403 68,596 5,649 5,293 :142,811 69,077 4,588 5,149 1,178,298 129,394 15,043 165 1,062,0;30 147,220 13,243 173 8,511 N/A 1,32:3 N/A 355 43 101 27 1,651 956,022 1,775 695 ,461 27,791 649 29,332 501 2,172 2,252 354,26 9 431,180 992 1,110 256,569 286.246 6,298,889 N/A N/A 5.440 ,009 N/A N/A 2,092,745 2,159 15,158 2,061,895 89:3 3.901 $ Curre ncy received and counted Coin received and counted Collections Check Collections Commercial checks Government checks "?" Re t urn it ems Noncash Collections Discounts and Advances T otal d iscounts and advances Number banks accommodated Fisca l Agency Savings Bonds & Savings Notes Other Treasury Issues Other Fiscal Curre ncy ver ified and destroyed Food sta mps received and processed E lectr onic Funds Transfer Wire t ra nsfers Automated clearinghouse Government deposits * Include s 416,186 notes verified by weighing without counting, therefore not comparable wit h chart dat a ** Doe s not include weighed coin, so 1977 figure is not comparable *** In cludi ng postal money orders 22 Twelfth Federal Reserve District Washington ~. Salt Lake CIty Utah Arizona Directors The Federal Reserve carries out its central-banking functions through a nationwide network of 12 Federal Re serve Banks and their 25 branches, under the policy guidance, coordina tion and gene ral supervision of the Board of Governors in Wash ington, D.C. The Head Office of t he Federal Reserve Ban k of Sa n F rancisco has a nine-me mber Boa rd of Directors. Each of the Bank's ot her offices at Los Angeles, Portland, Salt Lake City and Seattle has a seven -member Boa rd, following a recent (January 1978) change which brought all Branch boards up to the size of the Los Ange les Board. Federal Reserve directors br ing man agement expertise to the task of over seeing Reserve Bank operations. They also provide first -hand information on key economic deve lopments in various areas of the District, complementing the Ban k's internal research efforts. In addition, Board members give advice on the general direction of monetary policy, especially with regard to the Bank's disco unt rate. T he Head Office Board has specific responsibility for initiating changes in the d iscou nt rate, subject to review and approval by the Boa rd of Governors. San Francis co Chairman of the Board and Federal Res erve Agent Joseph F. Alibrandi President and Chief Executive Officer Whittaker Corporation Los Angeles, California Cornell C. Maier, De p uty Chairman President an d Ch ief Exec utive Officer Ka iser Alum inum and Chemical Corp . Oakland, California Ronald S. Ha nson President and Chief Executive Officer First National Bank of Logan Logan, Utah Frederick G. Larkin , J r. Chairma n of the Boa rd and Chief Executive Officer Security Pac ific National Bank Los Angeles , California Ole R. Mettler President and Chai rman of the Boa rd Farmers & Merchants Bank of Central Californ ia Lodi, California Dorothy Wrig ht Nelson Dean and Professor of Law University of Sout hern California Law Center Los Angeles, Califo rn ia Clair L. Peck Chairman of the Board C. L. Peck Contractor Los Angeles, California Malcolm T. Stamper, President The Boeing Company Seattle, Washington J . R. Vaughan Chairman, President and Chief Executive Officer Knudsen Corporation Los Angeles, Cal ifornia Federal Advisory Council Gilbert F. Bradley Cha irman of t he Boa rd and Ch ief Executive Officer Valley National Ban k of Arizona Phoenix, Arizona 24 Alibrandi Maier Peck Nelson Stamper Mettler Larkin Hanson Vaughan 25 Federal Advisory Council Los Angeles Chairman of the Board Caroline Leonetti Ahmanson Chairman of the Board Caroline Leonetti Ltd. Hollywood , California W. Gordon Ferguson, President National Bank of Whittier Wh ittier, California Ahmanson Fern Jellison , General Manager Social Services Department City of Los Angeles Los Angeles , California James D. McMahon, President Santa Clarita National Bank Newhall, California Joseph J. Pinola Chairman and Chief Executive Officer Western Bancorporation Los Angeles , California Ferguson Jellison Harvey A. Proctor Chairman of the Board Southern California Gas Company Los Angeles , California Armando M. Rodriguez, President East Los Angeles College Monterey Park, California McMahon Pinola Proctor Rodriguez 26 Portland Chairman of the Bo a rd Loran L. Stewart, Dire ctor Bohemia, Inc. Eugene, Oregon Merle G. Bryan, P resident Fores t Grove National Bank Forest Grove, Oregon Jean Mater Partner and General Manager Mater Engineering Corvallis, Oregon Ste wart Phillip W. Sch neider Northwest Regional Executive National Wildlife Federation Portland , Oregon Kenneth Smith, General Manager The Confederated T ribes of Warm Springs Warm Springs, Oregon Robert F. Wallace Chairman of t he Board First Nationa l Ba nk of Orego n Portland, Oregon Bryan Robert A. Young, P resident Northwest National Bank Vancouver , Washington Schneider Smith Wall ace Youn" 27 Salt Lake City Chairman of the Board Sam H. Bennion President and Chief Executive Office V-I Oil Company, Inc. Idaho Falls, Idaho 'j . Robert E. Bryans Chairman of the Boar d and Chief Executive Officer Walker Bank & Trust Company Salt Lake City, Utah . . ~ Bennion Robert A. Erkins Geothermal Agri/Aquaculturist White Arrow Ranch Bliss, Idaho David P. Gardner, President University of Utah Salt Lake Cit y, Utah Bry a ns Erkins Mar y S. Jensen, Chairman of the Board Idaho State Bank Glenns Ferry, Idaho Fred H. Stringham, President Valley Bank and Trust Company South Salt Lake , Utah Joseph L. Te rte ling Chief Executive Officer J.A. Terteling & Sons , In c. Boise, Idaho Ga r d ner Jensen Stringham Terteling 28 Seattle Chairman of the Board Lloyd E. Cooney President and General Manager KIRO - Rad io & Te levision Seattle, Wash ington Merle Adlum, President Inlandboatmen 's Union of the Pacific Seattle, Washington Coon ey Douglas S. Gamble President and Chief Executive Officer Pacific Gamble Robinson Company Seattle, Washington Harry S. Goodfellow Chairman of the Board and Ch ief Executive Officer Old National Bank of Washington Spokane, Washington Donald L. Mellish Chairman of the Board National Bank of Alaska Anchorage, Alaska Adlum Virgin ia L. Parks Vice Preside nt for Fi nance and Bus iness Sea ttle University Seattle, Washington Rufus C. Smith Chairman of the Board The First National Bank of Enumclaw Enumclaw, Washington .....,.- Goodfellow Mellish Parks Smith 29 Comparative Statement Of Condition (thousands of dollars) December 31 , 1977 1976 Assets Gold certificate account Special Dr awing Rights certificate account Federal Reserve notes of other Federal Reserve banks Other cash , . . . . $ 1,298,964 149,000 Loans to Member Banks: Secured by Un ited State s Govern ment and Agency obligations Other eligible paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other paper . . . 4,950 25,000 Federal Agency obl igations . 1,055,187 923.728 United States Govern ment securities: Bills Notes Bonds . . . 5,479,183 6,658,969 1,166,537 5,244,459 6,522 ,586 914,399 $13,304,689 $14,389,826 $12,681,444 $13,606,172 ° 30,140 . Total United S tates Go v e r n m e nt secur ities Total lo a n s and securities ° $ 1,325,273 143,000 276,924 39,091 1,000 ° ° Cash items in process of collection Bank prem ises Operating equipment . . . 1,644,649 9,166 7,436 1,165,304 8,8 11 4,347 Other assets: Denominated in foreign currencies All other . . 2,567 $ 1,515,692 21,.590 $ 2,378,325 $19,047,440 $18,968,8:37 10,921,664 9,880,936 6,050 ,317 730,366 38,047 82,766 6,121,5 19 1,615,88;:; 29,934 137,490 $ 6,901,496 S 7,904,826 778,065 1.57,019 670, 242 242,105 $18,758,244 $18.698,109 144,598 144,598 1; 5,364 3 135,;:;64 $19,047,440 $18,968.837 Total assets Liabilities Federal Reserve notes Deposits: Member bank-reserve accou nts United States Treasurer-general account Foreign Other deposits . . . . . Total deposits Deferred availability cash item s Other liab ilities . . Total liabilities Capital accounts Capital paid in Surplus . . Total liabilities and cap ital acco unts Contingent liability on accep tances purchased for fore ign corr espondents 30 . ° () Earnings and Expenses (th ousands of dollars) December 31, 1977 1976 Cu rren t earnings Discounts and advances United States Government securities Foreign currencies All other . . . . $ 2,091 907,143 379 20 267 879,619 3,586 34 $909,633 $883,506 $ 61,863 5,295 63,151 4,924 $ 56,568 58,227 . $853,065 825,279 . . . 0 0 2,436 4,605 0 274 2,436 4,879 $ 20,201 6,607 193 3,184 0 $ 27,001 3,216 Total current earnings Current expenses Total cur rent expenses Less reim bursement for certain fiscal agency and ot her expenses Net expenses ........... . . . . Profit and loss Current net earnings Additions to current net earnings: Profit on sales of Un ited States Government securities (net) Profits on foreig n exchange transactions All other Total additions . Deductions from current net earnings: Loss on foreign exchange transactions (net) Loss on sales of United States Government securities (net) All other . $ . . . Total deductions 32 Ne t addit ions (+ ) deductions (- ) Assessments for expe nditures of Boa rd of Governors Ne t earnings before payments to United States Treasury Dividends paid Payments to United States Treasury (interest on Federal Reserve notes) . . . . . - 24,565 - 6,575 821,925 8,419 $804,272 1,663 0 826,942 7,519 801,762 Transferred to surplus Surplus January 1 Surplus December 31 . . . $ 9,234 135,364 $144,598 17,661 117,703 135,364 _ 31 San Francisco Branch P . O. Box 7702, Sa n Francisco, California 94120 Los Angeles Branch P . O. Box 2077, Terminal Annex, Los Angeles, California 90051 Portland Branch P . O. Box 3436, Portland, Orego n 97208 Salt Lake City Branch P . O. Box 780, Sa lt Lake City, Utah 84110 Seattle Branch P . O. Box 3567, T ermina l Annex , Seattle, Washington 98124 Prod uced by William Burke and Karen Rusk G raph ics designed by William Rosenthal 32