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'!I« 2 5C 7

5'3 1J1

/ 9 71

From the Board roo m


Nati onal Scene


Weste rn Business


Western Banking


Western Central Bank




Front Cover
Prop osed design of new headquarters building fo r the
Federal Reserve Bank of San Francisco, to be built near the
foo t of San Francisco' s Market Street. Ground breaking for
the 12-story, 653,OOO-square foot building is set for 1979.

ederal neserve Bank
of San Frc ci~t"o
, /



John J. Balles (left) , President
Joseph F. Alibrandi, Chairman of the Board


From the
The national and regional economies worked close to the
limits of effectiv e capacity du ring 1978. We w elcom e the
substantial gains in employment and income that accompa­
nied the nation 's production of more than $2 trillion of
goods and services du ring the year. However, we remain
very concerned about the severe inflation w hich is under­
mining the strength of an almost fou r-year-o ld business
expansion, and which is also unde rmining the confidence
of foreign nations in our ability to deal with this problem .

clearing houses, Gov ernment direct-deposit pro grams, and
the Federal Reserve w ire-transfer network. The staff
conti nued to work on a five-year automa tion program,
w ith an eye toward furthe r internal efficie ncies as wel l as
improved services for all sectors of the economy.
Bott om line, the San Francisco Reserve Bank onc e again led
the Federal Reserve System in the cost effectiveness of
operations , with an aggregate unit cost 15 percent belo w
the System average. Productivity in these operational
activities has increased 57 percent since 1974, following
the Bank's developm ent of a majo r program of productiv­
ity imp rovement. But we realize that futu re productivity
gains will depend heavily on the provision of up-to-date
equipment and facilities. Thus, we plan to br eak ground
this year fo r a San Francisco headquarters building which
will replace obsolete facilities constructed more than a half­
century ago.

Financial markets conti nued in 1978 to reflect the strains of
a still-strong, but inflation-wracked , business expansion.
Credit generally remained available, with $458 billion
(annual rate) raised in the marke ts during the first three
quarters of the year. (Incidenta lly, this is abo ut 50 percent
more than the amount raised as recently as 1976.) But
credit became increasingly costly as interest rates soared to
recor d or near-record levels, reflecting tighter policy
measures in the midst of growing market pressures, along
with the effects of inflation expectations . For example,
banks' prime business-lending rate rose from 7 314 to 11 314
percent over the cou rse of the year.

M anagement benefitte d greatly during 1978 fro m the
broad -based experience and judgment of the Bank's
directors at Head Office and four branches. The directors
not only pro vided guidance on major management deci­
sions and planning goals, but also supplied key info rmation
on economic and financial conditions as a suppor t to the
Federal Reserve's fo rmulation of monetary policy. Today ,
37 pub lic-spirited men and women serve as directors ,
representing a great variety of economic interests and
non -profit organizations from every area of the West.

The Federal Rese rve acted aggressively to curb domestic
inflation and to stem the decline in the international value
of th e do llar. In late fall, w hen the do llar's position had
worsened significantly, the Fed took several stro ng ac­
tions - raising its discount rate on member-bank bo rrow ­
ings a full percentage point to a record 91/2 percent ,
imposing supplementa l reserve requirements on large time
certificate s, and participating in a $30-billion support pack­
age fo r the dollar in collabo ration with the U.s. Treasury
and foreign financial authorities. Federal Reserve actions,
plus higher mon ey-market rates, cont ribu ted to a late-year
slowdow n in the growth of the money supply.

W e are grateful to these individuals, and also to those who
completed terms as directo rs during 1978: Ronald S.
Hanson (President and Chief Executive Officer, Fi rst Nation ­
al Bank of Logan, Utah) at our San Francisco office; W .
Gordon Ferguson (President, Natio nal Bank of Whittier,
Californ ia) and Armando M . Rodr iguez (President, East Los
Angeles College) at Los Angeles; Sam H. Bennion (President
and Chief Executive Officer, V-1 Oil Company, lnc.. Idaho
Fall s, Idaho) at Sal t Lake City; and Harry S. Goodfellow
(Chairman of the Board and Chief Executive Officer, O ld
National Bank of Washington) at Seattle. Special mention
must be made o f Gilbert F. Bradley (Chairman of the Board
and Chief Executive Officer, Valley Nationa l Bank of
Arizona), who completed a third term as this District's
representative on the Federal Adviso ry Council , a key
advisory group to the Federal Reserve System. Finally, we
wi sh to express our appreciation to our officers and staff,
w hose dedication to the effic iency of Bank ope rations has
enabled us to improve our services continu ally to the
financial community and to the general public.

The $295-billion regional economy served by the Federal
Reserve Bank of San Francisco exhibited all of the pressure
symptoms evident elsew here - and then some The pace
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 far
outpaced othe r banks wi th a 17-percent gain in loans and
inv estments, to a year-end total of $155 billion For the
second straight year, this region experi enced a phenom­
enal growth in real-estate financing, and it cont inued to
experience a surge in consumer borrowing and stro ng
credit demands from smaller businesses .
The San Francisco Reserve Bank met the needs of a
growing Weste rn economy by providing an expanded
amount of Reserve Bank services dur ing 1978. The Bank's
personnel handled about 1.4 billion paper checks, plus
abo ut 2 billion coins and 1 billion pieces of currency. At
the same time, the Bank continued to extend its electronic ­
payments capability , th rough such means as automated

Joseph F. Alibrandi
Chairman of the Board


John J Ball es


also exhibited considerable caution about the near-term
outlook by holding inventories firmly in check. Indeed,
inventory-sales ratios generally reached the lowest levels
of the past fifteen years. Another sign of strength was a
sharp, and long-awaited, pickup in export sales.

During 1978, the national economy continued to benefit
from the longest and strongest peacetime expansion of the
past generation. In the process, employment surged
while the jobless rolls declined substantially. But the other
side of the coin was somewhat tarnished. The strong
expansion was accompanied by a severe and accelerating
inflation, which was aggravated in turn by an unprec­
edented decline in the international value of the dollar.

Industrial production increased more than 5 1 2 percent in
1978, matching the previous year's growth pace. The
strongest increases occurred in such categories as busi­
ness equipment and construction supplies, reflecting the
upturn in business investment and the continued boom
in housing. By late-year, manufacturing production ap­
proached 86 percent of estimated capacity, not far
below the 1973 peak, and imposed a heavy strain on
usable industrial plant.

The national economy produced $2.1 trillion worth of
goods and services in 1978, although the growth rate (in
real terms) moderated somewhat during the year. Real
GNP increased almost 4 percent, compared with the
previous year's 5-percent gain. Yet the nonfarm business
sector of the economy expanded at roughly the same
pace in both years. Moreover, the level of output
reached in 1978 represented effective full employment,
measured in terms of the available reserves of exper­
ienced workers and cost-effective plant capacity.

Jobs and prices

Similar pressures surfaced in the labor markets. During
1978, more than 3 million more workers found jobs­
adding to the unprecedented job-market boom that has
generated 11 million new jobs since the early-1975 cyclical
trough. ln the fall months of the year, the unemployment
rate finally fell below 6 percent of the civilian labor force.
Moreover, experienced workers were at a premium: the
jobless rate for household heads, who comprise the core
of the labor force, fell to only 3 1 2 percent, and the
volume of help-wanted advertising rose one-fourth higher
than the 1977 figure.

Varying tre nds

Consumer spending for durable and nondurable goods
decelerated during the year. Household disposable in­
come (in real terms) increased about 4 percent, roughly in
line with the 1977 increase. But this gain largely reflected
an upsurge in employment. Despite heavy reliance on debt
financing, consumer buying of big-ticket items rose only
moderately, with (for example) a flat trend in the number
of auto sales. But surprisingly, housing activity remained
on the high plateau reached the year before, in the face of
soaring home prices and near-record mortgage rates.

The strong business expansion was marred, however, by
an unanticipated acceleration in the inflation rate, which
now threatens to mark the 1970's as the most inflationary
decade in the nation's peacetime history. Consumer
prices increased 9 percent over the course of the year,
compared with a rise of less than 7 percent in the
preceding year. Early-year farm disasters pushed consumer
food prices skyward, and the rapidly depreciating dollar
made many foreign products more expensive - typified by
the late-year announcement of a 14 V2 -percent increase
in OPEC oil prices for 1979. Wage-push inflation worsened

Business fixed investment continued to advance at a strong
pace, increasing about 8 percent in real terms. Earlier in
the expansion, investment spending had been concentrat­
ed in short-lived equipment (especially trucks and autos),
but in 1978 the emphasis shifted to construction projects
(especially factories and commercial buildings). While
showing increased confidence in the future through this
growing investment in long-lived projects, business firms



because of a 9-pe rcent jump in the business sector' s unit
labor costs, brought about by weaken ing productivity in
the face of soaring increases in labo r compensation.
M or e basically, the w orsening of the inflation problem
reflected the cont inuation of heavy Federal deficit spend- I
ing, as well as the related difficulty of reducing mon ey­
supply grow th to levels compa tible w ith the achieve­
ment o f lon g-run price stability .

of the majo r aggregates - M , (currency plus bank de­
mand deposits) and M 2 (currency plus all bank dep osits
except large negotiab le CD's). But w hile M 2' s 8-percent
growth fell w ithin the target range announced by the Fed
early in the year, M ,'s 7-per cent growth exceeded the
upper limit of its range.


Financial growth
To tal funds raised in financial markets expanded substan­
tially during the year, but with variations in different
secto rs of the market. Net Treasury bor row ings fell
significantly belo w earlier pro jection s, due to both an
increase in gove rnment receipts and a shortf all in expendi­
tures. Furthermore, heavy for eign investment in Treasury
issues reduced the share of the deficit w hich had to be
financed by domestic financial markets. In co ntrast, net
offerings by Federally sponsored agencies tripled over their
1977 levels, reflec ting heavy borrowing by housingrelated agencies. Co rpor ations w ere less active in the
capital markets than they had been during the earlier
stages of the expansion, bu t they again relied heavily on
the com mercial-paper market fo r funds . Co nsequently,
banks failed to win back all of the groun d w hich they had
lost earlier to these oth er competito rs for co rpo rate

Dollar problems
The do llar' s decline repre sent ed probably the least expect­
ed , and most disheartening, development o f the year.
Prior to Novemb er, the trade -weighted value of the dollar
had drop ped abou t 15 per cent from the year-b efor e
level, and far more steeply against the yen, the mark and
the Swiss franc. The 15-percent decline, by itself, may
have added as much as 2 percentage poi nts to the past
year 's rise in con sumer prices. Actuall y, the natio n' s trade
accounts improved significantly over this period, w ith the
trad e def icit in the fall mo nths being not much mor e than
half the first-quarter peak. D espite that and oth er signs of
improvement, fo reign investo rs sold dollars heavily dur­
ing 1978, appar ently out o f fear that U.s. inflation would
get o ut of co ntro l.


Policymakers moved in several wa ys to co nf ront the
inflation problem throughout the year, and especially
dur ing the fateful final we eks of O ctob er. To reduce cost­
push pr essures, the Administratio n announced a set of
w age and price guide lines, designed to pu t a 7-percent lid
on annual wage increases and (essentially) a 6-to- 6 1 2
per cent lid on annual pric e incre ases. To reduce defic it­
financing pre ssures, the Administration emphasized its
determinatio n to cut the Federal bud get defi cit to abo ut
$30 billion in fiscal 1980 from the $49-billion figure
reached in fiscal 1978 . These measures failed to attract
suppo rt in intern ation al financial mark ets, how ever, so
policymake rs adopted a stro nger stance on November 1,
with a $30-billion package of dollar-propping measures
and a tighter anti-inflation credit poli cy.

Sho rt-term intere st rates rose mo re than three full
percentage poin ts dur ing the course of the year, w ith the
sharpest increase occurring after the Novembe r 1 credit­
tightening mov es. Treasury bill yields rose at a slow er pace
because of heavy foreign pur chases. But rates on Federal
funds, large CD 's and commercial pap er all ro se sharply, to
levels not far below the record highs expe rienced in
mid- 1974. Banks attempted to maintain their pro fit margins
by raising the prim e rate for their best corporate
borrowers 15 times du ring the year, to a near-reco rd 11 3!l
percent - up four percentage point s over a year ago .
Long-term bond rates increased gradually over much o f
the year - but then accelerated in the fo urth quar ter .
The much faster rise in rates o n short er maturities pro­
duced an inverted yield curve beyond six to nine
month s, indicating more favorable investor s' expe ctations
about the long-run than abou t the short-ru n inflatio n
outlook . M eanwhil e, w ith hou sing activit y still booming,
prime mortgage-loan rates rose as high as 10 3 per cent
at so me banks, and in some states exceeded legal usury

Monetary policy
The Federal Reserve took action dur ing 1978 to mode rate
the growth of the monetary aggregates, and in addition,
to stem the decline in the exchange value of the dollar.
The Syste m raised the discount rate - the rate charged
by Federal Reserve Banks on member-bank borrow ings­
in a series of steps between January and O ctober, from
6 to 8 V2 percent, and then boosted the rate to a record
9 V per cent o n November 1. At the same time , the Fed
imposed a 2-pe rcent suppleme ntal reserve requir ement on
all large domestic time depos its and on certain oth er
bank sour ces o f funds.

Expanding bank credit
Com mercial-bank credit provid ed financial support for
the expanding l.l.S. eco nomy w ith an 11-percent increase
fo r the year, and the loan co mponent accoun ted for
over nine-tenth s of the tot al incr ease. Business-loan activity
bec ame more broa dly based than it had been earlier in
the expansion, as the large mon ey-center banks (primar ily

These cent ral-bank actions, plus higher mo ney-market
rates, co ntributed to a late-year slowd own in the growth


in New York) at long last joined the region al banks in
meeting cor po rate-loan demand . W ith co nsum er borrow­
ing pressures still heavy , banks practically matched their
strong 1977 gains in both mortgage and instalment-credit
lending . Banks again reduced their portfolios o f Treasury
securities, but offset this somewhat by adding to their
holdings of Federal agency and municip al securities.

and their cost of funds, by making quick adjustments in
loan rates wh enever money-market rates increased . This
was particularly true in the latter part o f the year.
On the other hand, bank earnings suffered from a shift
from less costly sources o f funds (those subject to
deposit-rate ceilings) to more expensive sources acquired
at accelerating money-mark et rates. Savings deposits
increased only modestly in comparison with the previous
year's $18-billion increase, partly because many savers in
the second half of the year transfered their funds to the
new T-bill certifi cates, wh ich were not subject to rate
ceilings. These certificates became a relatively costly
source of fund s late in the year, w hen Treasury-bill and
other mon ey-m arket rates skyro cketed . Again, as in earlier
high-rat e periods, banks relied heavily for funds on large
CD 's, w hich increased by $22 billion - twice the previous
year' s gain. These funds became eve n more costly in
November, when the 2-percent supplemental reserve
requirement became effecti ve. Anot her late-year cost
increase came about because of the implement ation o f the
automatic-tran sfer account s, wh ich invo lved heavy start­
up costs in addition to the 5-percent interest expense on
individual funds that fo rmerly had been held in intere st­
free checking account s.

Increases in both demand and time depo sits provided
funds fo r the rapid expansion in bank cred it. But banks
o bt ained about two-fifths of the gain in the latt er categor y
from large CD 's, despite the sharply higher rates they
had to pay on these money-mark et instruments. Two
noteworthy deposit inno vation s occurr ed following Fed­
eral Reserve approval- the initiation of automatic transfers
from savings accounts , and the linking of the six-month
time-certificate rate to the six-month Treasury-bill rate.
Both o f these innovations enhanced banks' ability to
retain fund s in this period o f sharply rising money rates.
Bank earnings
According to preliminary data, bank pro fits reached a new
peak in 1978. The large increase in earning assets, heavily
we ighted toward mortgage and consum er loans, boosted
inco me fro m interest payments Banks generally main­
tained a pr ofitable spread between their return on loans




Tax revolt
A widesprea d tax revo lt stron gly aff ected the region's
political economy du ring 1978 . At the June election,
California's electo rate vo ted overwhelmingly for Prop osi­
tion 13, a ballot measure invo lving a $7-billion redu ction in
pr operty-tax receipt s - a sum amounting to almo st one­
fift h o f the to tal revenu es raised by all levels o f Californi a
government . At the Novemb er election, tax- or spending­
limitation measures appeared on the ballot in five other
Western states, and the measures passed in all of them
except Oregon.

The Western economy experienced a boom year in 1978,
measured by rapi dly falling unempl oyment rate s as w ell as
rapidly rising emp loy ment and income statistics (This
region, w hich is served by the San Francisco Federal
Reserve District, includ es all nine states w est of the
Continental Divide - see map, page 14.) The pace of
expansion w as much faster in this region than in the rest of
the nation , followi ng a patt ern set even be fore the
beginning of the pr esent cyclical expansion.
Population growth stimulated economic growth, as about
600,000 new resident s bo osted the regional population to
nearly 35 million in 1978. This phenomenon repre sente d
the continuatio n of a long-term west w ard shift o f the
natio n's popu lation - a shift which has become especially
evident during the pr esent decade. Between 1970 and
1978, migrati on accounted for almo st half o f the region 's
total population gain o f 4.3 million , creating doubl e-digit
grow th in almost eve ry W estern state. Californ ia, the
largest. was an exception in the early years o f the decade,
but growth has now speeded up there also. In 1978,
California added 400,000 new residents with migration
accounting for three-fifths of that total- the largest inflow
in over a decade.

Despite Proposition 13's apparent popularity throughout
the nation , the circumstances surround ing that measure
we re almo st unique to Californi a. A major contributing
factor wa s a high and gro w ing state-local tax burd en
dur ing a period when similar burd ens w ere levelling of f in
other states. A second factor w as a substantial shift in the
distributio n o f prop erty -tax burdens towards home-o wn­
ers, at a time w hen inflation already was causing bud getary
problems for many hou seholds. And a third factor wa s the
emergence of a massive state-government surplus in the
months preceding California's June election.
Proposition 13 achieved two o f its object ives - pr operty­
tax reduc tion and state-surplus liquidation. However, its
initial impact on publi c-expenditure growth wa s rather
modest, largely because the state go vernment pro vided
more than $4 billion in direct assistance to local govern­
ment s out of its surplus funds. In its first year of o peration,
Proposition 13 is reducing the level of pub lic expenditur es
by roughly 2 V percent . Accord ing to some analysts, its
future impact coul d be even less, because of the co ntinu­
ing build-up in the state gov ernment's budget surplus, the
highly responsive character o f the state's revenue system
to economic-growth tren ds and to inflation , and pro bably
also a surprisingly strong growth in property-tax revenu es.

More job s, more income
Civilian employment in this nine-state area jumped about 6
percent - an unprecedent ed increase o f roughl y 900,000
new jobs - to reach a new peak of 15.3 million. Employ­
ment gains were substantial in practically ever y industry ­
especially con struction , aerospace-equipment manu factur­
ing, trade and services . The o nly exception wa s the
gov ernment sector , where employment remained flat
because of tight fiscal co ntro ls at every level, typified by
California's Proposition 13 slash in property-tax revenu es.

Reflecting this very active job market, unemployment
declined from 7.5 percent o f the civilian labor force in
1977 to about 6.7 percent in 1978 . The im prov eme nt w as
evident in almo st eve ry Wes tern state . Indeed , the strong
expansio n brought the rate do wn to about 6.0 percent by
year-end, almost closing the w ide gap that had persisted
between the regional and nation al jobless rates fo r mor e
than a decade .

Partial farm recovery
After two so lid years o f drought and depressed livesto ck
prices, W estern farmers and ranchers began to pro fit in
1978 from green pastures and brim -full reservoirs . Acco rd­
ing to pre liminary estimates, total farm sales exceeded the
1977 figure by almo st 5 per cent. Net farm income grew at
about the same pace, since the drought's demise helped
ease some exceptionally high o perating costs for a numb er
of farm enterprises . Ma ssive exports helped boost the
W estern farm community, as dol lar depreciation made its
pro ducts exceedingly att ractiv e in w orld markets.

Personal income incre ased more than 12 V2 percent to
abo ut $295 billion in 1978. Mu ch o f the gain was eaten
aw ay by inflation, as consumer prices rose more than 8
per cent during the year - but the result was still a solid
gain of more than 4 1 2 percent in real income . The
consumer buying pace was rather uneven during much of
1978, but ev idently quickened during the Christmas sea­
son. New -car registration s increased for the third straight
year, but the gain wa s somew hat mod est in relation to the
gains of the 1976- 77 per iod.

The livestock industry provided the brightest news on the
agricultural front , as producers found themselves in the
trou gh o f the cattle cycle, w ith redu ced supplies bu t with
rapidly rising prices. Some of the cattle-price rise came
w ith the compliment s o f M idwest hog producers, who


because of their newly-granted ability to offer savings
certifica tes at rates tied to Treasury-bill rates.

failed to expand output as they had originally inte nded .
Thus a 4-pe rce nt decline in beef output, paralleled by
virtually no growth in po rk ou tput, sent Western cattl e
prices soaring 33 percent above 1977's low levels. Net
income from ranching operations also benefi tted fro m the
wet weather, w hich dramatically imp roved pasture and
range conditions, and there by reduced the need fo r high­
cost feed and wa tering o perations.

A massive boom in nonresidential buildi ng accompanied
the contin ued strength of ho me-building , and these devel­
opments together placed heavy pressures on the regional
lumbe r industry . Timbe r shortages meanwhile fo rced a 3­
percent reduction in W estern lumber product ion for the
year, and thus fo rced dom estic builders to turn increasingly
to foreign suppliers to meet thei r requirements. No t
surprisingly, softwood lumbe r prices climbed almost with­
out interruption, to practically do uble the average level
reached during the 1974 recession . In the pulp- and-paper
segment of the industry, producers also raised pric es
sharply - partly because of strength ening dema nd, and
partly because of a second-half tightening of supp ly
caused by a prolonged strike at Pacific No rt hwes t mills.

W estern wheat farm ers also found welcome relief from
the dro ught, as their outp ut and per-acre yields rebound ed
sharply from 1977 levels. Total wheat production nation ­
wide droppe d abou t 12 perc ent, wit h farm ers elsew here
cutting back on their acreage, and W estern farme rs thus
sold more wheat at prices which averaged about one ­
fo urth higher than a year be fore . Wes tern fruit growers
meanwhile pro duced somewhat less, bu t earned substan­
tially higher prices o n the products they sent to market in
1978. (For example , grower prices fo r oranges ran abou t
32 percent above 1977 leve ls.) Cotton production fell
co nsiderab ly, but in this case prices also slid, under
pre ssure from the large stocks left over from the previo us
year' s harvest.

Busy factories
Western manufacturing production expanded at a faster­
than-nation al pace, sparked by co nsiderable strength in
durable-goods manufacturing . In partic ular, the aerospace­
equipment manufacturing industry recor ded its stro ngest
sales gains in years, w hich spurred a 14-percent increase in
industry employment ove r the course of the year. (Still,
aerospace employment remained abo ut 20 percent below
its Vietnam -war peak.) The main stimulus came from the
w or ld airline industry , whi ch responded to the rapid

Agricultural land prices in the West increased almost 10
percent, reflecting the recovery in the regio nal industry's
fo rtunes. Indeed, a numb er o f facto rs were invol ved, such
as the brea k in the pro longed d rought, climbing livesto ck
and specialty-crop prices, population pr essures on rural
land, and the general atmosphere of inflation. These
pressures were most intense in Califo rnia, where farmland
price s jump ed 13 percent durin g the year .

Ho using- still strong
The Wes tern hou sing boom co ntinued in 1978, as new
starts and new building permits roughly matched the peak
levels attained the year before. Through most of the year,
the pace of perm it activity actu ally ran slightly ahead of
1977's peak figure of 473,000 housing units. The specula­
tive buyi ng pressures w hich had marred the earlier stages
of the boom w ere mostly lacking, expecially in California.
Even so, demand and cost pr essures pushed the medi an
price of new homes to $64,900 at midyear - 22 percent
above the mid- 1977 leve l. Wes tern ho me prices, w hich
ro ughly paralleled nationa l prices prio r to 1975, by 1978
were 16 percent higher than home prices elsewhe re.
De mand pressures remained high, partly because of the
lo w level of vacancies in for -sale and rent al hou sing, and
also because of the wides pread belief that buying a home
repr esented the best inflation hedge. Financing problems
aro se as the year w or e o n, reflecting the high cost and
decreasing availability of mortgage money. However, lend­
ing institution s had mor e funds available than they might
have expected for a tight -money period, at least partly



'c ~

.., '

" " "

share of the Western market thus fell to 26 percent. (It had
been 48 percent at the 1976 peak.) In fact, Alaska in 1978
became the nation's third-largest oil producer, being
outranked only by Texas and Louisiana.

growth of passenger traffic by placing large orders for
both the present and the next generations of jets. In this
regard, Boeing's 757 and 767 planes launched the nation's
first new commercial-jet manufacturing programs in a
decade. Defense and space business also increased, along
with consumer demand for electronic products.

Western refineries were able to absorb only about half of
the North Slope's production of 1.1 million barrels/day,
after allowing for supplies from other Western fields, the
refineries' product mix, and their technical capability for
processing high-sulphur Alaskan crude. This situation has
created a debate over the best means of utilizing the
Alaskan oil that is surplus to West Coast needs. Producers
now ship most of this surplus oil by tanker to the Gulf and
East Coasts via the Panama Canal. But more efficient
alternatives are under consideration, such as pipelines that
would transport oil either from Port Angeles, Washington
or Long Beach, California to refineries farther East. Some
industry leaders have proposed a swap arrangement with
Japan- under which surplus Alaskan oil would be exported
to Japan, while an equivalent amount of Japan-bound oil
would be diverted to the East and Gulf Coasts - but that
alternative has been criticized for running counter to the
national goal of energy self-sufficiency.

Western steel demand rose sharply, due to the strong
pickup in non-residential-building and heavy-engineering
projects as well as the continued rise in consumer-goods
markets. But foreign producers increased their share of the
Western market from 34 to 40 percent, despite the
introduction of the "trigger price" mechanism designed to
blunt just such an import drive. Regional steel producers
thus benefitted only partially from the sharp increase in
demand, recording a 7-percent rise in production for the
year as a whole.
The Northwest's aluminum industry benefitted fully from
the upsurge in demand from aerospace and other indus­
tries. Moreover, it recovered well from its earlier supply
problems, as winter rains brought an end to drought­
related shortages of hydro power. The regional copper
industry, in contrast, continued to operate its mines and
refineries far below capacity, in an effort to cope with a
worldwide problem of excess supplies. Refinery shipments
to Ll.S. fabricators rose only about 5 percent for the year,
and remained far below the 1974 peak. However, produc­
ers were able to boost their price for the refined metal
steadily over the course of the year, because of the
umbrella provided by the devaluation of the dollar, which
raised the foreign producer price in dollar terms.

Slower pace in 1979?
At year-end, most observers foresaw a slower pace of
business activity in 1979, if only because of the pressures
generated by shortages of trained manpower and usable
industrial capacity throughout the regional economy. But
the West once again seems likely to outpace the national
economy, on the basis of the strength expected in such
regional specialties as aerospace and agriculture - industries
which boast attractive products that can sell well in both
domestic and overseas markets.

Petroleum situation
The improved weather situation also helped bring about
slight declines in Western production and consumption of
refined petroleum products, because regional utilities were
able to increase their reliance on hydro power and thus
reduce their usage of fuel oil during the year. But not
surprisingly, industrial and transportation demands for pe­
troleum rose significantly. Regional production of crude oil
increased sharply for the second straight year as more
Alaskan oil flowed through the pipeline, and the import

Construction activity might remain stable, with the weak­
ening trend in the housing sector being offset by the
growing strength of factory and office construction. Some
sectors seem bound to weaken, especially government
spending in the wake of Proposition 13 and a host of other
budget-tightening measures. But overall, the Western
economy appears capable of extending the expansion into
a fifth consecutive year.


The pace o f banki ng, like the pace of general business
activity, expanded much mo re rapidly in the West than
elsewhere duri ng 1978. Tota l loans and investments
reached $155 billion at year-end, fo r a 17-pe rcent in­
crease - half again as large as the gain recorded in the rest
of the nation. A $23-billion loan increase accounted for this
enti re bank- credit gain, as tot al investment portfolios
remained even with a year ago. Thro ughout most of the
year, banks we re able to meet the recor d loan demand
w ith funds generated from deposi t inflow s and maturing
assets, rather th an by selling or running-off securities But
late in 1978, in response to the increasing restrictivene ss of
monetary po licy, banks reduced their security hold ings, or
at least their holdings of Treasury securities.

A massive 29-per cent increase in mortgage loans accompa­
nied the Western co nstruction boom, as credit availability
remained greater than in ot her per iods of high intere st
rates. The stro ng pace of business activity helped support
a favorable enviro nment fo r hou sing, and this tren d was
reinfo rced by borrowers' expectations that home prices
and mortgage rates had nowhere to go but up . Lending
activity was strong not onl y in single-family housing, but
also in commercial real estate and (especially) construction
and land-development pro jects. At year-end, mortgage
loans reached $43 billion, at which point they con stituted
34 percent of total loan po rtf olios.
Consumer instalment loans increased almo st as rapidly as
mortgage loans, although consumers entered the year with
a histo rically high ratio of instalment debt to personal
inco me. Strong increases occ urred in auto financing and
ho me-improvement loans, and also in check-credit and
credit- card loans.

Sharp loan expansion
Business loans increased by a stro ng 15 per cent, despite a
near-re cord prime rate , an increasingly restrictive monetary
poli cy, and only moderate demand by the banks' large
co rporate custo mers. (Here as elsewhere, large firms
continued to rely heavily on the capital and co mmercial­
paper marke ts for funds.) The strength in this market again
came from the small and medium-sized firms that are
much more dependent on bank financing than are the
large corporate borrowers. Mos t industry groups bor­
rowed heavily during the year, but loan growth was
especially brisk in the constr uction, trade , services and
durable -goods manufacturing sectors .

New deposit sources
Banks financed their soaring loan vo lume by generat ing
abou t $17 billion in new deposits, for a 12-percent gain
ov er the year. About half of the dep osit growth came
fro m large time certificates (CD's), as inflow s from ot her
sources lagged. This heavy reliance on CD funds became
most evident in the second quarter , when many savers
w ithdrew funds in search of higher yields in the open


market, and again in the fo urth quarter, w hen an increas­
ingly restrictive monetary policy affected deposit flows .

Yet banks everywhere had to conte nd wi th skyroc keting
increases in the cost of funds dur ing the year . Rates rose
sharply on large CD's, and also on Federal fund s. Again, by
year-end , rates on the new six-mo nth T-bill cert ificates
rose significantly above the rates paid on consumer-ty pe
time and savings depo sits, the gap widening to more than
4 per centage po ints betw een the new certificates and
consumer passbook account s.

Banks w ere able to count er disintermed iation - the ou t­
flow of funds into mon ey-mark et instruments - w hen they
received Federal Reserve authorization to issue six-mo nth
money-m arket certificates with rates tied to the six-month
Treasury-b ill rate . These certifi cates becam e an important
source of funds in the latter part o f the year - although a
relatively expe nsive source because mon ey-market rates
eventually rose w ell above the rates on the consumer-type
deposit s that they replaced. A second maj or deposit
innovation, automatic-transfer accounts, in cont rast did not
repr esent a significant new source of funds. These ac­
counts invo lve d a shift of customers' funds fr om other
types o f deposits, mainly dem and balances, into savings
acco unts that are tied to checking accounts.

Divergent '79 trends
M ost Western bankers anticipate a fairly stron g earnings
performan ce in 1979, although perh aps not quit e up to the
1978 standard. Some wa rning signs are o n the hor izon.
The record lending pace has reduced liquidit y levels for
some banks, so that they may adopt a less expansionary
stance in the new year . Also, the uncertainties in the
eco nomic outlook will for ce many institutions to put aside
mor e funds fo r po tential loan losses, which would tend to
curtail earnings.

Large Wes tern banks also relied heavily on increased
bo rrowings during the year. Banks' net Federal-funds
purcha ses (bor row ings) exceed ed $700 million on a daily­
average basis- dou ble the year-be fore level. Also, mem­
ber-b ank borrow ings reached $52 million o n a daily­
average basis- about o ne-third higher than the 1977
figure. This repres ented the highest level of activity at the
Reserve Bank's discoun t window since the tight-mo ney
peri od of 1974.

Business-loan demand may continue relatively stron g, espe­
cially if large co rpor ate bo rro w ers turn to the banks for
mo re financing because of the grow ing difficulty of
obtaining funds from o ther sources. O n the oth er hand,
there may be some w eakening o f hou sehold borrowing,
whi ch has been the mainstay of the W estern banking
com munity fo r the past several years. M or tgage-loan
demand should almost certainly subside, fo llowing tw o
years of record housing demand and the recent jump in
mor tgage-loan rates. Consumer instalment-loan demand
also could w eaken, given the heavy burden of individual
debt and the consumer's growing caution abo ut the
business outlook.

Average required reserves rose almo st $1 billion over the
year, mainly becau se of the bo om-related expansio n o f
dep osit activity , but also because of the late-year impos i­
tion of supp lemental reserve requirement s on large do­
mestic fun ds, including CD 's. However, reserve
requirem ents were only slightly affec ted by the reducti on,
and subsequent removal, of the reserve requiremen t on
U.s . bank borrowings fro m their for eign br anches.

In this envir onm ent, CD funds should continue to be a
major source of bank resour ces. These funds are likely to
remain expensive, however, partly because of the high
level o f interest rates paid on such vo latile deposits, and
partl y because of the supplemental reserve requ irement
now imposed on them . Banks meanwh ile might avoi d
serious pr oblems of disintermediation if they remain w illing
and able to pay market rates for the six-mo nth T-bill
certificates. In additi on to these and mo re traditional
sources, banks will have a new source o f available funds ­
the Treasury tax-and-lo an account program, wh ich perm its
them to borr ow excess Treasury dep osits at a rate tied to
the Federal-fund s rate. And in the last analysis, Western
banks may again profit from a faster-than-national expan­
sion of business activity, and hence from a broader scale
of lending op por tunities than their national counte rparts
can expect.

Record earnings
The bott om line for 1978, accordi ng to early estimates,
was a recor d leve l of Western bank earnings. O perating
income ro se substantially over the year because of record
loan volume, coupl ed wi th record or near-r ecord levels of
interest rates. Many banks nation wide profited by main­
taining substantial spr eads between their average ret urn on
assets and their average cost of funds. But Wes tern banks
also benefitte d from their retail orientation , because their
loan portfolios cont ained a high proportion o f high-yielding
consumer and mor tgage loans, wh ile their liabilities were
heavily conce nt rated in low-yielding savings deposits.








( ~.)


r - '- I--l- --t- -i- --t_-t_.J_J

The National Scene_
In Brief





The national econorny r d



Real GrOwt h
and Inflation

Real Growlh




uted to the P'oblem Ai ' e, ['Oduct,v,ty all COnt,ib _
of inflation ' eflected th O e _ 'cally, the wO"en ing
' "
e", denc" spendin
e cont'nu"'on of heavy Fed­
of ' educing mane
as the ' elated difficulty
Patibl with I
y Pp y g'OWth to level; cOm­



uced $2, 7 trillion WOrth

strong expansion wa norn,c growth rate , But the
p nce UPSurge Farrn d's rnarred b y an unan tir i
doll", and ;ag8in8 wO'k ers' a rap '. y d epceoatmg




mOde'''ion in the ICes In 7978 aIth aug h W'th ; ome
. '





of goods and serv o


g:s~; ~ell


ong-r un p nce stability.

M i/lio",



The level of OutPUt r


fu:a~rne ~






- I _

Unemployment Rates



last Year repre _
sented effective
, p o Yrnent, rnea­
ured in ter
experienced rns °k aVaIlable reser ves of

Ost-e ffect,ve


p lant capacity Or. 'th and C
W ers
'ob -rnar k et boorn, Iabo an 77 '/I"

rn, IOn new

797 we re cr
oVer the course of the

5- 78
expa nsion, The unern I
rate COntinued to d I'
P 0Yrnent

eClne In 7978' In d, ed

expenenced workers were t
e ,
rneasured by the low ' a a prernlUrn,
household heads w
rate fo r
of the labor
ho cornpnse the Core






















$ Billions

Balance of

Interest Rates


Twelfth Federal Reserve District




. , ..__ t:?£J'"


S ail Lake Cily








Management Committee
(Shown from left to right)
Richard T. Griffith, Senior Vice President , Bank Operatio ns
John J. Balles, President
Kent O . Sims, Senior Vice President, District Dep artments
John B. Willi ams, First Vice President
J hn J. Carson, Senior Vice President , Corporate Staff


Federal Reserve Bank of San Francisco
Organization Chart
February 2, 1979

Senior Vice President
Di strict Depa rt ments
Kent O . Sims

District Departments

Senior Vice President &
Director of Research
Mic hael W . Keran

Vice President
Bank & Com munit y Relations
Robert C. Dietz

Vice President
Statistical & Data Servo
Wilhelmine vo n Turk

Vice President
Super., Reg., & Credit
Henry B. Jamison

Vice President
Bank Examinati ons
Eugene A . Tho mas

Director of
Economic Analysis
oseph R. Bisignano

Assl. Vice Pres.
Bank Relatio ns
Robert A. Johnston

Asst. Vice Pres.
W . Gordon Smith

Examining O fficer
Com mercial - SF
Wayne L. Rickards

Finan. Regulations
O ffi cer
Douglas C. Paul

Examining Officer
International - SF
Rodney E. Reid

Examining O ffi cers
Merle E. Borchert
Co mmercial- LA
G. Ross Varoz

Directo r
Computer O peratio ns
Hector M . Martin

Asst . Vice Pres.
& Economist
John H. Beebe

Research Officer
Herbe rt R. Runyon

Research O fficer
Peter Hsieh

Senior Vice President
Bank O perati ons
Richard T. Griffit h

Bank Operations

Vice President
Payment Services
Donald K. Carson

Vice President
Co mp ute r Services
Kenneth A . Grant

Director of
Public Info rmat ion
Willi am M . BtJrke

Asst. Vice Pres.
& Economist
Hang-Sheng Cheng

Director BHC
Harry W. Green

Vice President
Custody Services
W arren H. Hutchins

Vice Presiden t'
Claude W oessner

Director of
Co mputer System s
William V . Ott

Asst. Vice Pres.
Communicatio ns
Elwood E. Bernstein

Systems O fficer
S. Lee Flynn

Asst. Vice Pres.

Asst. Vice Pres.

Benjamin B. Gillespie

Roy A. Remedios

Cash O fficer
David Christerson

System s O fficer
Dav id Q. Ong


'S ystem Fiscal Resource Sharing

Analy sis and Control Officer
Gale P. Ansell


Assl. Vice
Robert H. (

Senior Vice President
Gerald R. Kelly

Asst. Vice Pres.
Check Collection
Kenneth L. Peterson

Asst. Vice Pres.
E. Ronald Liggett




General Auditors

Beverly J. Adams

Bruce H. Thompson

General Auditor

lames F. Leyman

Board of D irectors

O mbu dsman

Jane W . Langhorne


lo hn I. Balles

First Vice Presid ent

J hn B W illiams


Secretary's Office

Corporate Staff

Senior Vice President

Secretary's Office

Donald V. Ma sten

Senior Vice President

Corporate Staff

lohn J.Carson

Facilities Planning Staff

Vice President

Facilities Plannin g

Rix M aure r. lr.

Vice President

& General Counsel

Louis E. Reilly

rector of
m M . Burke
. Vice Pres.

Facilities Planning
O ren L. Christensen
Assoc. General
W illiam L. Cooper

1H. Beebe

Asst . Vice Pres.

Facilities Planning

Will iam K. Ginter

Vice President
Operations Support
H. Peter Franzel	

Director of
Corporate Personnel
M ichael ). Mu rray
Asst. Vice Pres.
legis. Analyst
Verle B. Johnston

Asst. Vice Pres.
BUdget & Control
Ade lle Foley



Personnel Officer
Connie L. Russell

Accounting Officer
loh n K. Davis	

District Security


Geo rge P. Galloway

Los Angeles

Senior Vice President
los Angele s
Richard C. Dunn

Vice President

lames M . Davis

Director of


Richard L. Rasmussen

Asst. Vice Pres.


R ert H. Colfelt



Asst. Vice Pres.
Admin. Services
Ma ynard C. Petersen

Asst. Vice Pres.
Admin. Services
I.W. Williams, lr.

Employee Relations
Raymond E. Kriese, lr.

Vice President

Angelo S. Carella

Asst. Vice Pres.
M . Timothy Carr

Asst. Vice Pres.	
Brent M. Du xbury

Check Officer
Sally K. Hackett

Salt Lake City

Asst. Vice Pres.


H. W illiam Pennington

Asst. Vice Pres.

Expenditures & Quality Control

Dougl as O . Knudsen


Asst. Vice Pres.
Patsy L. Haynes

Vice President
Salt lake City
A. Grant Holma n

Asst. Vice Pres.
Custody Control
Don W . Sheets

Payments Services
Rob ert R. Richards

Branch Operations
(Sho wn from left to right)
H. Peter Franzel, Vice President, Operations Support
A. Grant Holm an, Vice President, Salt Lake City
Gerald R. Kelly, Senior Vice President, Seattle
Angelo S. Carella, Vice President, Por tland
Richard C. Dunn , Senior Vice President, Los Angeles


Central Bank
During 1978, the Federal Reserve Bank of San Francisco
provided expanded central-banking services, in the areas
of checks, coin , currency, fiscal agency, and electronic
funds transfers, for a regional economy which continued
to grow faster than the rest of the nation . The Twelfth
District, which contains five Reserve Bank offices - in San
Francisco, Los Angeles, Portland , Salt Lake City and
Seattle - is the largest Federal Reserve District in terms of
both population and geographic size. It includes the states
of Alaska, Arizona, California, Hawaii, Idaho, Nevada ,
Oregon, Utah and Washington, plus the territories of
Guam and American Samoa - and serves 35 million people
and 522 banks with a total of 6,457 banking offices .

Federal Reserve check-clearing and automated clearing­
house services, which would be implemented after appro­
priate steps have been taken to alleviate the problem of
declining membership.
Congressional leaders plan to take up membership legisla­
tion early in the new session . Meanwhile, the San Francisco
Reserve Bank is continuing to inform banks of the value of
System membership and to respond to their needs by
discovering banks' problems and helping to solve them. To
this end , bank-relations personnel in 1978 provided techni­
cal advisory services for member banks, cost-of-member­
ship studies for potential members, and a series of
seminars on economic and financial developments for
bank and business audiences. In addition, the Reserve Bank
continued to offer member banks a functional-cost analysis
program, which takes advantage of the Federal Reserve's
unique ability to construct regional and national peer-group
comparisons from accounting data supplied by its

The Reserve Bank's scope of operations in 1978 reflected
the large size of its service area. For example, Bank staff
handled about 1.4 billion paper checks, not to mention 2.0
billion coins and 1.0 billion pieces of currency. At the same
time, the Bank continued to extend its electronic-payments
capability, through such means as automated clearing
houses, Government direct-deposit programs, and the
Federal Reserve wire-transfer network. District member
banks transferred $7.9 trillion throughout the country over
the Fed Wire network. The staff continued to work on a
five-year automation program, with an eye toward further
internal efficiencies as well as improved services for
commercial banks and the general public.

Supervisory responsibilities

Membership developments

Declining membership became a problem for the San
Francisco Reserve Bank, and for the Federal Reserve
System generally. In this District , six state-chartered banks
became members, and nine banks went off the member­
ship rolls, mostly because of mergers with other banks.
The System nationwide experienced a net loss of more
than 50 member banks during the year. As these numbers
suggest, it has become increasingly difficult to maintain
membership with the existing system of reserve
requirements .
The Federal Reserve submitted a package of legislative
proposals to Congress in July, which was designed to bring
about greater competitive equality among financial institu­
tions by reducing the net cost of System membership. In
particular, the Fed proposed to pay interest on required­
reserve balances held by member banks at Federal Re­
serve Banks. (Member banks, unlike nonmember banks, at
present earn no return on their required reserves.) The Fed
also asked Congress to impose universal reserve require­
ments on transactions balances held by all financial institu­
tions - such as so-called NOW accounts as well as demand
depos its - as a means of equalizing competition among all
depository institutions with third-party payment powers. In
return, nonmember institutions would gain access to
Federal Reserve clearing services. Finally, in November, the
System released a preliminary schedule of prices for


In the area of supervision and regulation , the Reserve Bank
prepared to take on the new responsibilities which were
conferred by the International Banking Act of 1978. The
legislation extended Federal control over the branches and
agencies of foreign banks operating in this country, and
over foreign-bank controlled commercial-lending compan­
ies that are engaged in banking activities . The act empow­
ered the Federal Reserve to impose mandatory reserve
requirements on Federally-chartered branches and agen­
cies of fore ign banks - and on State-chartered branches
and agencies whose parent banks hold $1 billion or more
in worldwide assets. The branches holding reserves would
gain access to Federal Reserve services. Also in the
international area, the Reserve Bank made a statistical
early-warning system an integral part of its bank-examina­
tion procedures, as a means of identifying potential
defaults or rescheduling of external debt in countries
where District banks have substantial financial assets.
The Reserve Bank's staff completed the development of a
new bank-rating system for describing and communicating
the results of bank examinations to the Federal Reserve
Board of Governors. The previous rating system included
only capital adequacy, asset quality and management in its
composite rating . The new system has added earnings and
liquidity, in order to provide a better measure of the
condition of the bank under examination . With minor
modifications, some version of the new bank-rating system
has been adopted by each of the Federal bank-regulatory
authorities. The Reserve Bank also continued to operate a
computerized financial-monitoring system, which provides
for continuous review of financial developments between
on-site examinations in institutions under its supervision.



The examination staff completed annual on-site inspections
of selected domestic bank holding companies and their
nonbank subsidiaries. Every effort was made in each case
to schedule the Federal Reserve's inspection of the holding
company concurrent with the examination of a subsidiary
bank or banks. This policy minimizes examination costs for
related institutions undergoing examination, and provides a
useful division of labor among regulatory agencies in cases
where the Federal Reserve is not the primary regulator of
the subsidiary bank .

The Computer Services Group moved into the second
phase of a five-year automation plan, installing essential
hardware and software components in accordance with
the Bank's basic strategy of centralized on-line processing.
Moreover, 1978 saw the beginning of a number of major
system-development efforts, which should greatly increase
the Bank's level of automation into the 1980's. These
efforts, among others, encompassed the Treasury tax-and­
loan system, the savings-bond issuing system, the publ ica­
tions mailing list, and the securities-transfer facility.

The consumer-affairs staff conducted examinations at all
state-member banks, and also at many of their branches,
as part of a System-wide program designed to achieve
broad-based compliance w ith consumer-protection laws
and regulations. In addition, the staff offered all member
banks the services of specially trained examiners for on-site
educational and advisory work in this field. The Reserve
Bank received about 500 individual consumer complaints
against commercial banks, and processed more than 100
such compla ints which were related to institutions for
which it is the primary supervisor. This workload is likely to
increase substantially in 1979 as the Federal bank regula­
tory agencies assume new responsibilities under the Com­
munity Reinvestment Act. Congress passed this legislation
as a means of encouraging banks and thrift institutions to
meet the credit needs of all credit-worthy borrowers in
their communities .

Payments activities

In check-processing activities, Bank staff handled about 1.4
billion paper checks during the year - a substantial
6-percent increase. This District cont inued to lead the
System in the cost effectiveness of check processing. In
addition, this Bank significantly improved the quality of
operations, reducing internal errors and delays in
In one major move, the Bank implemented the Treasury­
mandated government-check truncation program . ('Trun­
cation- involves shipping magnetic tapes and microfilm
copies of checks, instead of the original paper checks in
bulk , to the Treasury computer-operations center.) This
was a massive undertaking, since this District processes the
largest volume of government checks in the System-1 34
million in 1978.

Planning for the future

In electronic payments activities, District member banks
settled $7.9 trillion through the Federal Reserve's wire­
transfer system - a sharp 25-percent increase over 1977. In
addition, the San Francisco District continued to lead the
rest of the country as the largest processor of electronic
automated-clearinghouse items. This facility replaces
checks and permits automatic payroll deposits as well as
bill paying. In a major step forward , this Bank and other
Reserve Banks participated in the development of a
nationwide network which links up some 9,400 banks and
1,500 thrift institutions that are currently members of
automated clearinghouse (ACH) associations, along with
some 6,000 customer corporations . The 35 ACH's now in
operation - one private and the rest Federal Reserve
facilities - consist of computers wh ich clear and sort pay­
ments instructions recorded on magnetic tapes. The new
system requires no new facilities, but instead makes
intensified use of existing Federal Reserve computers and
wires .

In a key development, the Reserve Bank completed plans
for a new San Francisco headquarters building, to be built
on a site near the foot of the city 's Market Street. The
Bank's present headquarters building, constructed in the
early 1920's, is inadequate for meeting the requirements of
present-day banking operations. The new 12-story,
653,000-square foot building is designed to meet the
District's needs into the 21st century. The conceptual­
design phase of the project was virtually completed by
year-end, and groundbreaking is scheduled for 1979,
with completion around early 1982.
During 1978, the Bank restructured responsibilities within
its San Francisco Office, primarily by forming a Bank
Operations Division under Senior Vice President Griffith.
The new division encompasses three functions - custody ,
payments and computer services. This organizational align­
ment complements the recent formation of District com­
mittees for each major operating activity, with
representation from each office . Senior officers in San
Francisco who have accountability for these major activi­
ties provide District-level coordination . The senior o fficers
of the Bank Operations Division also have day-to-day
responsibilities at the San Francisco office. Consequently,
the Bank now has a central focus of accountability for
each major District operat ion.

Despite the increase in the use of checks and electronic
transfers, the Reserve Bank continued to handle massive
amounts of coin and currency, receiving and counting 2.0
billion coins and 1.0 billion pieces of currency during the
year. The Bank instituted several major efficiencies in the
cash activity during the year. Under one new program ,
commercial banks deposit excess fit currency in sealed

plastic bags, so that the currency can then be paid w ithout
the need fo r Reserve Bank ver ification and sorting . Unde r
a second program, the Mint now delive rs large shipments
o f coin directly to or dering commercial banks; this makes it
unnecessary fo r the Reserve Bank to participate in the
actual physical shipments, and in many cases significantly
shortens the transpor tation routes. The Bank also imple­
mented a cash-management pro gram, w hich pro vides for
transferring excess fit currency of particular denomina tions,
or excess amo unts of unverified currency, from offices
with surpluses to offices w ith shortages. These measures
permit maximum use of currency-sorting resources on a
District-w ide basis, and also help reduce backlogs of
unverified curre ncy at all offices .

ciencies in the processing of food coupons. Also, the Bank
imp lemented the new Treasury-mandated tax-and-Ioan
investment program, whereby the Treasury earns interest
by investing its operating cash balances, whi le paying fees
for certain services which it formerly received free from
financial institutions. The Bank was also designated the lead
bank, on a jo int com pute r resource-sharing pro ject with
the Kansas City and St. Louis Districts, to develop a majo r
new system to handle the increasing volume of govern­
ment-security purchases, sales, transfers and account
hold ings.
As for the bottom line, the San Francisco Reserve Bank
continued to lead the Federal Reserve System in the cost
effectiveness of operati ons, with an aggregate unit cost 15
percent below the System average. Productivity (outp ut
per worker-hour) in these operational activities has in­
creased 57 percent since 1974, following the Bank's
development of a major program of pr oduct ivity improve­
ment. And despite substantial increases in w orkload, the
Bank's staff over the past decade has increased only 3

Fiscal activities
In its role as fiscal agent fo r the U.s. government, the
Reserve Bank cont inued to handle substantial amounts of
paper - in the fo rm o f savings bonds , marketable Treasury
securities, and food stamps - wh ile achieving new eff icien­
cies through com puter handling of securities. During the
year, the Bank intro duced a prog ram which , through
statistical-sampling tech niques, permi tted substantial effi­

Number (thousands)

Value (millions)

Currrency and Coin
Currency received and counted
Coin received and counted



1 140 ·166

1 '171U48
12.9 ' 94


7 U89
5,9 11

cl.) , 1


, -\






~ ;B ) , 6 g 4

952 ,60 1
1,996 ,005

Check COllections

Commercial checks . ,
Government checksH
Return items

.. ,

Noncash Collections

452.40 3
68 'i%








.) , ~



IS 04 ,



Discounts and A dvances
To tal discoun ts and advances
Numb er banks accommod ated


Fiscal Agency
Savings Bonds & Savings Notes
Other Trea sury Issues
Other f iscal


Currency verified and destroyed
Food stamps received and processed

9 :;0 \.22


.­ )



'1" ,


4 ~-

..''7 -.I


28,42 7

2~h . )h ~'


.2 Q')')
2. l,tJ
,, ) jin



': h l)

Electronic Funds Transfer
Wi re transfers
Automat ed clearinghouse
Government depo sits . .


h 2 18.1)8'-1
. \






Actual figures
Including postal mon ey o rde rs



7,87 1,412
N/ A
N/ A










The Regional Scene_



In Brief









The Pace o f banking, Hke the pace of gene"l busi­
ness act>v,ty, expanded much mO'e 'apldly In the
creased 75 Perce t d
We" than elsewhe'e dUtlng 1978. 8uslness loans In­

Loan Growth

Reserve Bank

. or, esplte a near-record prime
'ate, an 'nc'ea"ngly 'e"tlcl/ve monetacy poHcy and
only mOdecate demand by the banks' lacge c';,po­
'ate CUstome" . But fa, the second st"lght Yeac the
household secto, accOUnted fa, the majo, pa;t of
the ove"l1 loan Inuease, as both mongage and
consume, loans Inueased by one-founh o'mo'e.

The Fedecal Rese've Bank of San F"ne/sco

met the needs of a g'oWlng W


Omy, W'th ,ts 35 million people, by P'ovld­

'ng an expanded amOUnt of Rese've Bank

se'v'ces dU'lng 197B. Fa, example the

Bank's staff handled 1.4 billion pape,
checks, 2.0 b"Hon Coins and 1.0 billion

p'eces o f CUttency, along With 3.0 million

w'te t"nsfe,s of funds. In volume, check

cOllect'ons tOtalled $639 bll/lon, and mem­

be'-bank t" nsfe" of funds ave, the Fed
Wire network tOtalled $7.9 trillion.

San Francisco

The Federal Reserve carries out its central-banking func­
tions through a nationwide network of 12 Federal Reserve
Banks and their 25 branches, under the policy guidance,
coordination and general supervision of the Board of
Governors in Washington, D.C. The Head Office of the
Federal Reserve Bank of San Francisco has a nine-member
Board of D irectors. Each of the Bank's other offices at Los
Angeles , Portland, Salt Lake City and Seattle has a seven­
member board .

Chairman of the Board and Federal Reserve Agent
Joseph F. Alibrandi
President and Chief Executive Officer
Whittaker Corporation
Los Angeles, California

Federal Reserve directors bring management expertise to
the task of overseeing Reserve Bank operations. They also
provide first-hand information on key economic develop­
ments in various areas of the District, complementing the
Bank's internal research efforts. In addition, Board mem­
bers give advice on the general direction of monetary
policy, especially with regard to the Bank's discount rate.
The Head Office Board has specific responsibility for
initiating changes in the discount rate , subje ct to rev iew
and approval by the Board of Governors.

Frederick G. Larkin, Jr.
Chairman of the Executive Committee
Security Pacific National Bank
Los Angeles, California

Cornell C. Maier, Deputy Chairman
President and Chief Executive Officer
Kaiser Aluminum & Chemical Corp.
Oakland, California

Ole R. Mettler
President and Chairman of the Board
Farmers & Merchants Bank of Central California
Lod i. California
Dorothy Wright Nelson
Dean and Professor of Law
University of Southern California Law Center
Los Angeles, California
Clair L. Peck, lnr .
Chairman of the Board
C. L. Peck Contractor
Los Angeles , California
Malcolm T. Stamper
The Boeing Company
Seattle, Washington
J. R. Vaughan
Chairman, President and Chief E
xecutive Officer
Knudsen Corporat ion
Los Angeles , California
Robert A . Young
Chairman of the Board and President
Northwest National Bank
Vancouver, Washington
Federal Advisory Council
Chauncey E. Schmidt
Chairman, President and Chief Executive Officer
The Bank of California, N A
San Francisco, California




M ett ler








Federal Ad visory Council

Schmid t

Los Angeles
Chairman of the Board
Caroline Leonett i Ahmanson
Chairman of the Board
Caroline Leonetti Ltd.
Ho llyw ood, California

Fern Jellison
General M anager
Social Services Dep artm ent
City of Los Angeles
Los Angeles, Califo rnia

Ahm anson

ames D . McMahon
Santa Clarita Nationa l Bank
Newhall, California
Harvey J. Mitchell
First National Bank of
San Diego County
Esco ndido, California

Joseph J. Pinola
Chairman and Chief Executive
Western Banco rporation
Los Angeles, California

M cM ahon

Harvey A. Procto r
Chairman of th e Board
Southern Califo rnia Gas Co mpany
Los Angeles, California




Togo W . Tanaka
Gramercy Enterprises
Los Ange les, California



Chairman of the Board
Loran L. Stewart
Dire ctor
Bohemia, Inc.
Eugene, Oregon

Me rle G. Bryan
Forest Grove National Bank
Forest Grove, Oregon
Stew art

Jack W . Gustavel
President and Chief Executive Officer
The First National Bank
of North Idaho
Coeur d 'Alene , Idaho
ean Mater
Partner and General Manager
Ma ter Engineering
Corvallis, Oregon
Phillip W . Schneider
Northwest Regional Executive
National Wi ldlife Federation
Portland, Oregon


Gustav e!

Kenneth Smith
General Manager
The Confederated Tribes of
Warm Springs
Warm Springs, O regon
Robert F. Wallace
Chairman of the Board
First National Bank of Oregon
Portland, Oregon
Schneide r




Salt Lake City
Chairman of the Board
Wendell I. Ashton
Deseret News Publishing Company
Salt Lake City , Utah
Robert E. Bryans
Chairman o f the Board and
Chief Executive Officer
Walker Bank & Trust Company
Salt Lake City , Ut ah
Rob ert A. Erkins
Geothermal Agri / Aquaculturist
White Arrow Ranch
Bliss, Idaho


David P. Gardner
Un ivers ity o f Utah
Salt Lake City, Utah
Mary S. Knox
Chairman o f the Bo ard
Idaho State Bank
Glenns Ferry, Idaho


Fred H. Stringham
Valley Bank and Trust Company
South Salt Lake City , Utah
j . L. Ter teling
The Ter teling Company , Inc.
Boise, Idaho






Seatt le
Chairman of the Board

Lloyd E. Cooney
President and General Manager
KIRO-Radio & Television
Seatt le, Washington
Merle Ad lum
Vice President
Seafarers Internatio nal Union
of North America AFL-C10
Seattle, Washington
C. M . Berry
Seafirst Corporation and
Seattle-F irst National Bank
Seattle, Washi ngton


Douglas S. Gam ble
President and Chief
Executive Officer
Pacific Gamble Robinson Company
Seattle, Washi ngton
Donald L. Mellish
Chairman of the Board
National Bank o f Alaska
Anchor age, Alaska







Virginia L. Parks

Vice President for Finance

and Business

Seatt le University

Seatt le, W ashington

Rufus C. Smith

Chairman of the Board

The Fir st National Bank

of Enumclaw

Enumclaw , Wash ington


(Thousands of Dollars)
December 31,


Go ld certificate acco unt

Special D rawi ng Rights certificate account

Fede ral Reserv e not es o f o ther Feder al Reserv e Banks

O ther cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .






Lo ans to Member Banks:

Secured by United States Go ve rn ment and Agency obl igatio ns

Other eligible paper

O ther paper







0:; "

3U 12


2.J ,()OO


Feder al Age ncy obligatio ns


'1) ­

1,046,7 45

) 47" 18'
(, ,., 51'.LJb '1
I If 6.5r


;, 13 304,689

$15,8 13,333

Unite d States Go vernment secur ities


No tes

Bond s


Total United States Government securities

Total loan s and securities


Cash item s in proc ess of co llections

Bank p rem ises

Operating equipm ent




Other assets:

Denomin ated in foreign currencies

All ot her

2,0 31,377

1644 b4'


::' -'f36

1,507 ,133

$ l,515,b'J 2

Total assets


S 14.()4;· ,44U


$2 1,078 ,090

Federal Reserve note s

M emb er bank - reserve acco unts . . . . . . . . . . . . . . . .
United States Treasurer-general acco un t . . . . . . . . .

For eign

Other deposit s

1(, ':J2




To tal deposits


Deferred availability cash items

Ot her liabilities


.1) :;0 l17


7 3t
-) ~



~ I ...

/',.2 -1»

12,132 ,792

7,10 2,59 2


s 7,789,8 12

o )h5

559,03 5








To tal liabilities





Capital accounts
Cap ital paid in

Surp lus


Total liabilities and capital account s
Co ntingent liability on accept ances purchased fo r for eign co rrespondents



(Thousands o f Do llars)
December 31,

Current earnings
Discount s and advances . . .
United States Gove rnm ent securities
Foreign currencies ,
All ot her . .


'1IF , I~,
':~ .' ':1



1,09 1,753


Total current earnings

Current expens es
To tal current expenses
Less reimb ursement fo r certain fiscal agency and o ther expenses

S h 1 Bb :,

Net expenses


., 2





t( )

) i 1 ')(:,fl

Profit and loss
$ 1,035,555

Current net earnings ..
Additions to current earnings:

Pro fit on sales of United States Go vernm ent securities (net)

Pro fits on foreign exchange transactio ns

All ot her .. , '


Total addit ions

Deductions fro m current net earnings:

Loss on fo reign exchange transaction s (net)
Loss on sales o f United States Go vernmen t securities (net)
All oth er



-' ~i





" ..'7,ClO

Net additio ns (+ ) ded uctions (-) .
Assessments fo r expenditur es of Board o f Gov erno rs .
Net earnings before payments to Unite d States Treasur y
Dividends paid
Paymen ts to Uni ted States Treasury (int erest on Federal Reserv e no tes)



1-\21 'lL:;
H ·11'l


Transferred to surp lus
Surplus J
anuary 1 , . ,
Surplus December 31

t) ,

" .2 )-~
1)), ' ) r) ~






l' iJil­ 

Total deductions



- 87,6 11
- 7,488
940,45 6

San Francisco Branch
P.O . Box 7702 , San Francisco, California 94120
Los Angeles Branch
P.O . Box 2077, Termi nal Annex , Los Ange les, Califo rnia 9005 1
Portland Branch
p.o. Box 3436, Portland , O regon 97208
Salt Lake City Branch
P.O. Box 30780, Salt Lake City, Utah 84125
Seattle Branch
P.O. Bo x 3567, Terminal Annex, Seattle, Was hington 98124

Produ ced by W illiam M. Burke, D irector of Public Information,
and Karen B. Rusk, Manager, Publication s and Graphics;
Graph ics designed by William Rosenthal, Graphi c Artist;
Federal Reserve Bank of San Francisco.