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;/6- 2 5"& 7 (;3 AI / 9 71 )f-etkltfl/ {is-erie Btll7,r 1/1 If2..nl7('/~ I If~() rf. TABLE OF CONTENTS National Scene 3 4 Western Business 9 Western Banking 13 From the Boardroom Western Central Bank 19 Directors 24 E-ederal Reserve Bank of San Francisco FEB 25 1 980 LIBRARY 1 Joseph F. Alibrandi Chairman (1979) John J. Balles President 2 Cornell C. Maier Chairman (1980) FROM THE BOARDROOM The final ye ar of the 1970's was a fitting climax to an unsatisfactory decade, with a mixed report card of pluses and minuses. The national economy expanded by more than 2 percent during 1979, but production weakened in several key indu stries such as housing and autos . Employment continued to advance steadily, with a record 59V2 percent of the adult population working in paid employment, yet the productivity of that labor force actually declined. The price situation meanwh ile worsened, climaxing the most inflationary peacetime decade in the nation's history, and in the proce ss continued to undermine the strength of the dollar in overseas markets. Financial markets in 1979 reflected the strains of the inflation-wracked business expansion . Credit generally remained available, even though more expensive, with $489 billion (annual rate) raised in the markets dur ing the first three quarters of the year. But credit became increasingly costly as interest rates soared to record levels , reflecting tighter po licy measures as well as widespread inflation expectations. For example, banks' prime business-lending rate rose by four percentage points for the second year in a row, reaching a late-fall peak of 153/ 4 percent before declining to 15 percent at many banks at year-end . The Federal Reserve acted aggressively to curb domestic inflation and to stem the decline in the international value of the dollar, especially in an historic policy package adopted on October 6. At that time, the Fed raised its discount rate on member-bank borrowings a full per centage point to 12 percent, imposed a marginal reserve requirement on increases in the aggregate total of certain sources of bank funds -and above all, fundamentally changed monetary-control procedures so that the principal focus was on control of bank reserves and monetary growth. Interest rates were permitted to fluctuate over a much wider range , in contrast to the former practice of pegging the Federal-funds rate governing inter bank borrowing. These Federal Reserve actions, plus higher interest rates, contributed to a marked slowdown in the growth of the money supply in the final quarter of 1979, as a necessary first step in efforts to slow the pace of inflation. The $345-billion regional economy served by the Federal Reserve Bank of San Francisco expanded at a much faster rate than the rest of the country, following a pattern set early in the decade . For example, Western commercial banks outpaced other banks with a 14-percent gain in loans and investments, to a year-end total of $170 billion. Real-estate and consumer loan demand continued almost unabated throughout the year, and business loans showed considerable strength for three quarters before weakening towards year-end . The San Francisco Reserve Bank met the needs of a growing Western economy by providing an expanded amount of Reserve Bank serv ices during 1979. The Bank's personnel continued to handle massive amounts of check s, coin, and currency, but electronic payments grew spectacularly during the year. While check-processing activity increased 6 percent, wire funds transfers increased 23 percent, and automated clearinghouse and government-deposit activity jumped 44 percent. As for the bottom line, the San Francisco Reserve Bank continued to rank among the top two Reserve banks in the cost effectiveness of operations, with an aggregate unit cost 9 percent below the System average. Productivity in these operational activities has increased 65 percent since 1974, following the Bank's development of a major program of productivity improvement. But we realize that future productivity gains will depend heavily on the provision of up-to date equipment and facilities. Thus, we are breaking ground this year for a San Francisco headquarters building which will replace obsolete facilities constructed more than a half-century ago. 3 Management benefited greatly during 1979 from the broad-based experience and judgment of the Bank 's directors at Head Office and four branches. The directors not only provided guidance on major management decisions and planning goals, but also supplied key information on economic and financial conditions as a support to the Federal Reserve's formulation of monetary policy. Today, 37 public-spirited men and women serve as directors, representing a great variety of economic interests and non-profit organizations from every area of the West. We are grateful to these individuals, and also to those who completed terms as directors during 1979. We owe an immense debt of gratitude to Joseph F. Alibrandi (President, Whittaker Corporation), who showed great gifts of leadership and motivation during his just completed term as Chairman of our Board of Directors . Our heartfelt thanks also go to several other individuals who completed tours as directors: Dorothy Wright Nelson (Dean and Professor of Law, University of Southern California Law Center) at our San Francisco office; and Fern Jellison (General Manager of the Social Services Department, City of Los Angeles) and Joseph J. Pinola (Chairman and Chief Executive Officer, Western Bancorporation) at Los Angeles. Finally, we wish to express our app recia tion to our officers and staff , whose dedication to the efficiency of Bank operations has enabled us to improve our services continually to the financial community and to the general public. Cornell C. Maier Chairman of the Board John J. Balles President February 1, 1980 NATIONAL SCENE The decade of the 1970 's experienced some notable ach ievements and some even more notable failures. On the positive side , the national economy grew 32 percent (in real terms) between 1969 and 1979-a substantial gain, even though it failed to match the 50-percent gain of the preceding decade. Again, real disposable per cap ita income-a key measure of individual well -being increased 28 percent in the 1970's, or almost as much as it did in the 1960's. But the nation ate up much of its seed corn in reaching its higher standard of living . Real business investment increased only one third as fast , and worke r productivity less than half as fast , as in the preceding decade. Worse still , the nation became increasingly dependent for its raw materials on unstable and expensi ve sources of supply, as evidenced by a 15-fold rise in the price of Middle Eastern oil over the decade. The yea r just past ty pified the decade , wit h some significant achievements overshadowed by a gene rally uneven overall performance. Technically speaking , 1979 could not be called a recession year, because employment, income and real outpu t all increased during the period . At the same time, the pace of business definitely slowed , and some major industries suffered substantially. Even worse , inflation accelerated further, aggravated by the soaring price of ene rgy and the continued weakness of the dollar aga inst at least several major cur rencies . SOURCES OF DEMAND Real Growth and Inflation Change (%) 15 Nominal GNP ; Heavy demand stimulus came from the public sector during the 1970's, as massive Federal spending increases outpaced tax revenues and created red ink on the books for every single year of the decade. Indeed, the combined Federal deficit for the decade, $315 billion , matched the combined total forthe entire earl ier history of the Republic. Inflat ion became an ever-worsening problem , reflecting this prolonged series of deficits, the stimulative monetary expansion tha t sometimes accommo dated them, and a series of supply-related shocks. Co nsumer prices practically doubled over the course of the decade, in the worst peacetime inflation in the nation's history. The acce lerating inflation in turn led to a decline in the power of the once- mig hty dollar in the wor ld's financial markets. 10 Inflation 5 Real Growth 0~~""'1..oof""""''''''''''' 1976 1970 The national economy produced $2.4 trillion worth of goods and services in 1979, as a second-quarter decline in real output failed to offset at least modest gains in each of the othe r quarters. Real GNP increased 2.3 percent-consider ably below the preceding year's 4.4 percent gain , which was more in line with the economy 's long-run potential. Yet the level of output maintained in 1979 repre sented effective full employment, measured in terms of available reserves of experienced workers and cost-effective plant capacity. 1979 Consume r spend ing decelerated during 1979,after serving earlier as the mainstay of the four-year-Iong business expansion. Househo ld disposable income (in real terms) increased 2.2 percent-consider ably below the 1978 gain-and even that increase largely reflected an expansion of employmen t. Despite continued heavy reliance on debt financing , consumer purchases of big-ticket items actually declined (in real terms) as the year progressed , and the 1980-model auto year opened on a notably sour note. Residential-hous ing activity weakened , with a 14.8-percent decline in housing starts , but the drop was less than might have been expected in view of soaring home prices, record mortgage rates, and a diminished availability of mortgage money. Business fixed investment (in real terms ) continued to advance at a relatively strong 5.8-percent pace, offsetting at least part of the decided weakness earlier in the decade . Prior to 1978, investment spend ing had been concentrated in short-lived equ ipment (especially trucks and autos) , but in the 1978-79 period the emphas is shifted to construct ion projects (especially factories and commercial buildings). While continu ing to show 4 increased confidence in the future through this investment in long -lived projects , business firms exhibited caut ion about the near-term outlook by holding their inventories firmly in check , although with some notable exceptions. Expo rt sales represented the strongest single element in the 1979 picture, rising 10.0 percent in real terms as the earlier dep reciation in the dollar's va lue opened overseas markets to many U.S. producers. In contrast, government spendi ng flattened out in real terms, reflecting in part the impact of a nationwide tax revolt. JOBS, PRICES AND THEDOLLAR A slowdown in the economy wa s accompanied by a slowdown in the previous headlong pace of job expansion . Still, employment increased by a respectable 2.5 million in 1979, wh ich altogether me ant a 13.5-million expansion in jobs since the early-1975 cyclica l trough. Thus, by mid-1979 , an unprecedented 59.4 pe rcent of the work ing-age population was on somebody's payroll. The unemployment rate was relatively stab le, averaging 5.8 percent of the civilian labor force for the year. Moreover, expe rienced workers remained in short supply ; the jobless rate for household heads, wh o comprise the core of the labor force , dec lined to a very low 3.6 percent. Change in Employment Change ..."""'-l" 3 .- 2 o ......,.-.....iIIrt-lH----I Consumer Price Change Percent 25 - 1 20 -2 1970 10.2-percent jump in the private secto r's unit labo r costs , brought about by declin ing productivity in the face of subs tantial increases in labor compensation . Most dramatically, the price of the OPEC oil upon which the nation increasingly depends practically doubled over the yea r, and the effects were soon felt throughout the eco nomy. 1973 1976 1979 A severe inflation continued to undermine the business expansion , climaxing one of the worst inflationary episodes in the nation's history. The GNP price index (deflator) , the broadest measure of price change, rose 8.8 perce nt after a 7.3-pe rcent increase in the preceding year. The consumer price inde x rose even faster - indeed, increased 13.3 percent between year-end 1978 and year-end 1979-although that index ove rstated the actual price rise for such reasons as an overweight ing of home-mortgage cos ts, which affect only a limited number of households. Basically, the worsening of the inflation problem reflec ted in part the continuation of heavy Fede ral deficit financing as well as the related difficulty of reducing money-supply growth to levels compatible with the achievement of long run price stability. But several other factors aggravated the price upsurge. In 1979 as in 1978, early-year farm disasters pushed food prices skyward , wh ile a depreciated dollar made foreign products more expensive. Wage-push inflatio n worsened because of a near-record 5 15 10 5 o 1oo-~1...I""'1..01""""""...&.'" 1970 1973 1976 1979 The natio n's interna tional acco unts improved considerably in 1979 . Bu rgeon ing foreign demand for U.S. goo ds , spa rked by a cheaper dollar, offse t much of the rising bill for imported oil , while income on earl ier foreign inves tmen ts soa red in response to the increased value of many foreign currencies . Consequent ly, the deficit on current account dropped from a massive $13.5 billion in 1978 to practically zero in the first three qua rters of 1979. Nonetheless, the world's financial markets moved from crisis to crisis dur ing the yea r, with inflation fears and the Iranian revolution leading many market participants to flee from many currencies -not simply the dollar-and to buy gold and silve r instead. (Gold mo re than Ba la nce of Payments s Billions 20 ... ~~ _ _...... 10 - 10 - 20 - 30 L-.&...&..L.L.............~..,. 1970 197 3 doubled and silver more than quad rup led in price over the year.) Policymake rs saw the basic problem as the acce leration of inflation at home and abroad, so the Federal Reserve moved dec isively on October 6 to bring that situation under bette r control. MONETARY POLICY DEVELOPMENTS Restrictive monetary-policy actions early in 1979- i ncluding seve ral boosts in the discount rate (from 9V2 to 11 percent) had failed to stem the rapid growth of the money supply and ofthe inflation indexes . Hence the Federal Reserve unveiled a three-part policy package on October 6: 1) increasing the discount rate on member-bank borrowings a full per centage point , to a reco rd 12 percent ; 2) imposing an 8-percent reserve require ment on increases in the aggregate total of certain "managed liabilities," such as large negotiable time certificates (CD's) and Eurodollar borrowings, and 3) making a fundamental change in the System's monetary-control procedures to focus on controlling bank reserves, rather than on pegg ing the Federal-funds rate governing interbank bo rrowing. These actions helped produce a sign ifi cantly slower growth in the money supply and bank credit during the fourth quarter-and also a greater volatility in money-market rates before market partic ipants accustomed themselves to a new and unfamiliar operating environment. With the fourth-quarter deceleration, the ann ual gro wth of the narrow M1 money 6 suppl y (cu rrency plus bank demand deposits) fell within the 3-6 percent target gro wth range announced by the Fed early in the year. (This figure adjusts for the impact on demand-deposit growth of automatic transfer-from-savings accounts .) The growth of the broade r M2 measure (currency plus all bank depos its except large CD 's) came in slightly above the uppe r end of the Fed's 5-8 percen t target range after being considerably higher during most of the year. FINANCIAL GROWTH Net funds raised in 1979's financial markets roughly matched the 1978 total , according to preliminary estimates, as private-sector borrowing offset a decline in debt financing by the public sector. Although Treasury debt increased only half as fast as in 1978, foreign holders liquidated substantial amounts of govern ment securities, forcing the Treasury to rely more heavily on domestic purchasers to finance its debt offer ings . State-and local governments showed modest increases in borrowing and spend ing. In contrast, Federally sponsored agencies boosted their debt by record amounts, primarily in order to provide support for the weaken ing mortgage-finance industry. In the private sector, corporate long-term debt expanded at about the 1978 pace, but corporate short-term debt rose faster as firms increased their reliance on bank credit and doubled their sales of open-market paper. Although funds remained available , they also became more costly . Sho rt-term interest rates were three percentage points higher at the end than at the begin ning of the year, under the impact of accelerating inflat ion, energy shocks , and a tighte r Fede ral Reserve po licy. Rate movements also at times became very volati le. Money-market rates began climbing at midyear as business activity and inflation quickened, then shot upward after the October 6 pol icy package, and finally eased in November and December as the markets learned how to operate in the new policy environment. October's record rates on large CD 's, Federal funds and commercial paper prompted banks to hike their prime bus iness-loan rate to a record 153/4 percent, but they late r reduced that rate to 15 or 15% percent as their cost of funds began to decl ine. In contrast, Treasury-bill rates lagged considerably behind other money market rates . Interest Rates Percent 15 .----------iO-. 12 Long-term corporate bond rates rose modestly in the first half, accele rated during the summer as inflation expecta tions worsened , and then rose eve n faster in the fall months as fears surfaced about declining credit availability. Throughout the year, the yield curve retained an inverted shape , with higher yields on shor t- and intermediate-term matu rities than on long-term issues , as is typical of such inflation periods . Prime mortgage rates rose stead ily over most of the year, except in states with restrictive usu ry laws; in late fall they reached a record 14-percent rate in some areas , exerting a dampening impact on hous ing activity. BANK CREDIT EXPANSION Commercial-bank credit expanded by 11V2 percent , slightly behind the 1978 pace . Loans accounted for 84 percent of the total increase -down from the preced ing year 's 90-percent share-as banks built up their liquidity by add ing to their holdings of Federal-agency and tax-exempt securities whil e maintaining their Treasury securities at the 1978 level. Business use of bank credit accelerated to a 17-percent rate, with the borrowing pace at major money-center banks far exceeding that of small banks in the six months prior to October 6. Corporate 9 6 o 1978 1979 7 needs for working cap ital and for increas ingly expensive inventories expa nded during the relatively strong first and third qua rters , declined during the weak second quart er, and then fell sharply as monetar y policy tightened in the fourth quar ter of the year. In contrast, bank mortgage lending continued stro ng throughout 1979, although lagg ing be hind the phenomenal 1977-78 pace . The steep late-year rise in mo rtgage rates could have been expec ted to dampen activity in this area , but it came too late to affect 1979 data , because of the long time lag between mortgage comm itmen ts and actual loan take-downs. Cons ume r bor rowing meanwhile remained strong until about midyear, but the pace slac kened thereafter as consumers, as well as lenders, became more cautious in response to rising consumer-debt ratios and recession fears . To finance this cred it expansion , banks relied more heavily on time deposits (except passbook savings) than on demand deposits. Money-market certificates (MMC 's), with their rates tied to Treasury-bill rates, were the most noteworthy sou rce of funds. MMC's quadrupled in volume during the year, offsetting an outflow in fixed -ceiling savings deposits. Issuance of large negotiable CD 's declined slightly during 1979- unlike 1978 and other recent periods of high interest rates-because banks could obtain funds more cheaply through money-market certificates and some non-deposit sources such as Eurodollars. RI SING BANK EARNINGS Bank income reached a new peak in 1979 , according to preliminary data for the year. Operating eamings increased , as banks expanded their volume of earn ing assets and benef ited from soaring rates of retum on those assets-for example, with the rise in the prime business-loan rate from a midyear level of 11V2 percent to a fall peak of 15314 percent. With the help of such develop ments , banks were able to maintain a favorable spread between their retum on assets and their cost of funds . Money center banks in particular benefited from the large expansion in business loans at rates tied to the highe r prime rate. Reg ional banks meanwhile profited from portfo lios heavily weighted with high interest-rate mortgage and consumer loans, even though rates on such loans did not rise as fast as the business prime. Nonetheless, the cost of bank funds rose steep ly as the year progressed , especia lly in view of a shift from less costly sources of funds (those subjec t to depos it-rate ceilings) to more expens ive sources acqui red at accelerati ng market rates. Money-market certificates largely rep laced less-expensive savings deposits, and thei r cost climbed as Treasury-bill rates rose. Even the "core" savings depos its became more expensive after midyear, with a rise in the Regulation Q ceiling rate from 5 to 5% percent. Costs on other liabili ties-large CD's, Eurodo llars, Federal funds and discount-window borrowings-all rose to record highs after October 6. Moreover, many banks after that date became subject to the 8-percent ma rginal reserve requirements on increases in " managed liabilities" such as CD's and Eurodollars. Offsetting these factors, income statements at many banks benefited from a reduction in loan-loss reserves, which reflected their improved experience with loan write-offs and write-downs . Overall, banks' profit experience in 1979 reflected an imp ressive ability to weather a highly volatile interest-rate environment. f \ 8 WESTERN BUSINESS The widely heralded recession failed to appear in the West during 1979, as most industries confounded the experts and posted subs tantial gains in sales and payrolls. (This region , wh ich is served by the San Francisco Federal Reserve District, includes all nine states west of the Continental Divide-see map , page 23.) Some weak spots were eviden t- in the housi ng market, for instance -and these were aggravated by a severe inflation wh ich sapped the strength of an other wise hea lthy four-year-old expans ion. Most ana lysts expect those weaknesses to lead to a slowdown in 1980, but the dip (if any) shou ld be quite modest in comparison wit h the downturn antic ipated elsewhere in the nation. In 1979 as in other recent years , population growth provided a strong underpinning for economic growth . Since the 1970 census, in fact, the West's population has increased by rough ly 5 million, bringing the regional total to about 35'/2 million. Migration accounted for roughly half of that tota l popu lation gain, creating double-digit growth in almost every Western state. Th is means addi tional political as well as economic power, because the reappo rtionment following the 1980 census will probab ly mean one or more new House seat s for California, Washington , Arizona, Oregon and Utah. outpace the rest of the nation, as it has done since the early 1970's-indeed, in 1979, jobs increased twice as fast in the West as elsewhere . Employme nt gains were substantial almos t across the board, especiall y in aerospace manufacturing and a wide range of service industries. The only exception was the govemment sector, where emp loyment remained almost flat because of tight fiscal controls in practically every jurisd iction . Reflecting the active job ma rket, regional unemployment dropped from abo ut 6.8 percent of the labor force in 1978 to roughly 6.2 percent in 1979 . The improvement was evident in almost all Westem states. California in par ticular Cha nge in Employme nt Change (%) 6 .... ... ~ 4 2 Personal income in the West increased about 14112percent in 1979 , to about $345 billion- the largest annual gai n of this expans ion period. But most of the ga in was eaten up by inflation, as consumer prices rose about 11112percent between 1978 and 1979. Retail sales remained strong through much of the year considerably stronger than else where reflecting the gains in real as well as nominal income. Moreover, new -car registrations ran subs tantially higher than a yea r ago, at least prior to the open ing of the weak 1980 model year. TAX REVOLT o ~---......_ - - -... -2 ....................&....&..................... 1970 brought its jobless rate into line with the national rate in late fall. For more than a decade, that state's jobless rate had hovered one or two percentage po ints above the nation al rate, because of heavy in-migration and problems wit h key regional industries. Indeed, at the begin ning of the recovery in 1975, its jobless rate excee ded 10 percen t, but after a four-year-long expansion less than 6 percent of the state 's labor force was counted as unemployed . 1973 JOB GROWTH During 1979, civilian employment in this nine-state area jumped almost 5 percent-an increase of roughly 800 ,000 new jobs - to reach a new peak of 16.0 million . The job expansion lagged only the unsustainable pace set during the 1977-78 boom . Also, in term s of jobs as well as population, the West continued to 9 1976 1979 For the second stra ight year, a widespread tax revo lt dominated the political economy of the Western states, as voters continued to place tax- or spend ing-limitation measures on the books . In 1979, California voters passed the Proposition 4 ("Spirit of 13" ) initiative by a mass ive 3-1 margin-an even greater marg in than they gave the Proposi tion 13 tax -reduction initiative the year before. The new measure prohibits California state and local governments from increasing their spending any faster than increases in the consumer price index, plus proportional adjustments for population growth. In 1980, the California electorate will vote on a more drasti c measure, popularly called "Jaws II," which would reduce state income-tax payments by half, and apply an index ing formula to all such payments in the future . The latest initiatives reflect the dissatisfaction of Proposition 13's proponents with the legislative reaction to that measure. Prop 13 reduced California local property-tax revenues by 57 percent, but its effects were largely overcome by state" bail-out" transfers of $4.4 billio n in 1978 and $4.8 billion in 1979. But in the process, the state government ran a deficitfortwoyears in a row , depleting its once massive surplus- in effect, simply postponing the day of reckoning for local governments. On the other hand , Proposition 13's critics also found much to complain about; they argued, for example, that it reduced local autonomy by shifting tax and expenditure decisions to Sacramento, and that it raised debt-financing costs by making it im possi ble for local governments to issue new general-obligation debt. MANUFACTURING GROWTH Sources of Demand $ Billio ns 30 ... ....... 20 10 . Defense contracts 0--.. . .-.-----.. . _- 1970 1973 1976 1979 which spurred an 8-percent increase in industry employment over the course of the year. The main market stimulus came from the world airline industry. The airlines, responding to rapid passenger traffic growth and to the imperative to improve fuel efficiency, continued to place large orders for both the present and next generation of jet transports. Defense and space business also increased as \/\estern firms received more funding for production contracts, not to mention deve lopment contracts for new programs Regional income growth benefited in 1979 from a stronger-than-national expansion of manufacturing production, and also from a widening wage differential between the West and the rest of the nation. The key aerospace-equipment industry experienced boom conditions , 10 such as the MX mobile missile and the air-launch cruise missile. The electronic equipment segment of the industry benefited from increased consumer purchases of its products, such as the electronic games which dominated Christmas toy counters . The regional steel industry recorded only a 3-percent rise in production forthe year, as buyers dipped into inventories to meet increased demand for heavy-construction steel and other products. The "trigger price" mechanism helped reduce imports sharply, by raising the minimum permissible price for foreign steel. Even this provided little supportforthe regional industry, however, and two major producers late in the year announced plans to close some of their higher-cost basic-steel and fabricating facil ities. In contrast, the aluminum industry operated at virtually full capacity during 1979, as it strained to meet the increase in demand from aerospace and other industries. Its operations were somewhat hampered, however, by dry weather in the Northwest, which forced a late-year cutback in power supplies from Federal hydro-electric facilities. continued dropping to 23 percent-it was 48 percent at the 1976 peak- as W3stern refineries substituted more and more Alaskan oil for imports. The copper industry benefited from increased worldwide consumption-plus heavy speculative demand, which reflected the use of copper (and not simply gold and silver) as an anti-inflation hedge. Accordingly, regional producers reactivated some of the mine and refinery capacity shut down during the inventory buildup of the preceding year. In the process, they posted a sharp 40-percent rise in the price of refined metal during 1979. W3stern silver miners , who produce about half ofthe nation's silver, meanwhile experienced a quadrupling of prices over the course of the year, and responded with a flurry of exploration and development at a number of historic mining locations. Much of the Alaskan oil was surplus to West Coast refinery needs, because of a mismatch between the product-mix demanded regionally and the product-mix available from high-sulphur Alaskan crude , and also because of the refineries ' limited techn ical capability for processing that crude. Controversy surrounded alternative plans for transporting the surplus oil to Eastern U.S. markets , such as a proposed pipeline between Southern California and Texas, or between Puget Sound and Minnesota. With no progress on that front, the industry continued to rely on the inefficient method of shipping surplus oil by U.S.-flag tanker to the Gulf and East Coasts via the Panama Canal. But no one doubted that the nation could use every drop of oil that it could obtain from Alaskan and other domestic sources. Thus the oil industry paid a spectacular $2 billion for oil-and-gas development rights in the ice-choked Beaufort Sea off Alaska's northern coast, plus another $574 million for leases on Federal acreage off the Southern California coast. PETROLEUM PROBLEMS The supply problems and consequent upsurge in world oil prices that resulted from the Iranian revolution helped to limit the growth of the regional petroleum market. W3stern utilities and industrial plants boosted their demand for fuel oil, but gasoline consumption rose only slightly, reflecting last spring's sudden shortages and gas lines. Still, regional crude-oil production increased sharply for the third stra ight year, as the Alaskan pipeline 's capacity (and flowthrough) rose from 1.2 to 1.5 million barrels per day.The import share of the regional market CONSTRUCTION DEVELOPMENTS The construction sector was dominated by a boom in nonresidential building , w ith contract awards rising almost 20 percent in 1979, or double the pace set elsewhere. Demand for industrial and commercial space was heavy in Southem California, and also in Seattle, Portland, Salt Lake City and other centers. The boom seems certain to continue in areas such as Seattle, which plans to build more office space in the next four years than it did in the last decade. 11 In contrast, the housing market represented the major weak spot in the regional picture during 1979, as housing starts dropped roughly 15 percent below the peak 1978 figure, to about 460,000 units. (That decline was roughly in line with the national decline.) Even so, inflationary cost pressures pushed the median price of new W3stern homes to $73,000 at midyear-18 percent above the mid-1978 level , and double the price of five years ago. Demand pressures remained high, reflecting the strong evidence that buying a home is one of the best hedges against inflation. But financing problems afflicted the industry during the year, because of the high costs and decreasing availability of mortgage money. With mortgage rates reaching as high as 14 percent in late 1979, many prospective buyers were priced out of the market, especially those living in communities subject to usury-law rate limits. But financial institutions continued to have some funds available- in contrast to their plight during earlier housing crunches- because of their ability to attract funds through new money-market cert ificates. The national and region al housi ng decline redu ced the flow of incoming orders at \IoA3stern lumber mills, resulting in a 4-percent dro p in production for the year. But a heavy backlog of unfilled 1978 orders, plus the rising cost of timber from pub lic lands, pushed soft wood-lumber prices to historic highs. In September, producer prices stood 14 pe rcent above the year-earlier fig ure and more than double the average level reached duri ng the 1974 recession. But with the acceleration of the housing slide, prices declined to about the year-earlier level by year-end . The 'pulp-and-paper segment of the industry meanwhile experienced sha rp price increases throughout the year, because of strong demand, rising costs and a prolonged early-1979 strike at Pacific Northwest mills . FARM EXPANSION Despite substantial increases in production costs , the \IoA3stern farm economy recorded asignificant gain in net income on the basis of continued strength in domestic and foreign demand. Moderate overall temperatures and adequate water supplies generally provided excellent growing conditions, and farmers and ranchers produced bumper crops of many commodities. The decline of cattle herds meanwhile slowed after nearly four years of liquidation, in response to high beef prices and im proved grazing conditions. Export markets for \IoA3stern products remained very strong as a result of the continued weakness of the dollar and the continued upsurge of world food demand. Farm cash receipts increased almost 25 percentforthe year, with healthy gains in both the crop and livestock sectors . Crop re cei pts gene rally benefite d from stro ng produ ction gains, which offset weake ning prices in some sec tors. The citrus crop, for exam ple , was 19 perce nt larger than the frost-affected 1978 crop , and the Ca lifornia cotton crop was 16 per cent larger than the 1977 record. Crops of rice, nuts , feed grains and most fresh vegetables also posted significant ga ins. One notable exception, however , was potatoes, as Idaho produced its smallest crop of the past four years. Wheat production failed to match the bumper 1978 crop, and prices ran about 20 percent higher than a year ago . Catt lemen appeared to be moving out of the trough of the cattle cycle, as California and Oregon ranchers began to rebuild their herds, offsetting most of the decline recorded elsewhere in the \IoA3st. But along with herd rebuilding went a cutback in beef production, which boosted beef prices by nearly 22 percent and stimulated production of hogs and poultry . Record broiler production , for example, occurred both in regional and national markets, leading to some softening in the price of this product. Ranchers benefited from improved range and grazing conditions, which helped them offset a sharp 16-percent increase in feed costs. Agricultural exports increased 11 percent to $458 million, partly on the basis of heavy Asian and Eastern European demand. Shipments of hides , feed grains and vegetables were especially strong . Global demand for wheat kept wheat prices high, despite an increase in production of 14 percent worldwide. RECESSION IN 1980? On balance, 1979 turned out to be a rather solid year for the \IoA3stern economy, but 1980 could be somewhat more somber. 12 The housing indus try seems likely to decl ine even further, given the high price of housing and the decreased availab ility of mortgage money. (This means pro blems too for the Northwest's lumber industry.) Debt- and inflation-ridden consumers seem likely to reduce their purchases of postponable big-ticket items, primarily autos, given their need to budget first for increasingly expensive necessities. Most importantly, a worsening energy situation could spe ll trouble for the \IoA3st's tourist industry and many other industries besides. Yet withal , the West seems certain to get through 1980 with less damage than the national economy , perhaps with only a modest dip in its growth rate. The structure of the regional economy is in its favor , since it exhibits a smaller concentration of cyclical industries such as autos, and a greater concentration of relatively recession-proof industries such as trade and services . Another plus is the likelihood of a continued boom in the key aerospace-manufacturing industry . That industry holds a bulging orderbook full of new business from the world 's airlines and also from the Pentagon , which is boosting its spending in real terms for the first time in a decade. The strength of overseas demand for the region 's farm products and high-technology products , especially in the fast-growing Pacific Basin countries, also should provide underpinning for the Western economy . The overall outlook , then , is for a slowdown but not a major recession during 1980. WESTERN BANKING Banking activity, like business activity, expanded more rap idly in the I/\€st than elsewhere during 1979. Total loans and investments at District bank s' domestic offices reached $170 billion by year-end, for a 14-percent overall increase. Loan portfolios (up 16 per cent) grew by several percentage points more than they did at banks elsewhere, while securities portfolios (up 5 percent) rose at a lower rate. Real-estate and consumer loan demand continued almost unabated throughout the year , and business loans showed considerable strength for three quarters befor e tailing-off in late 1979. And unlike their 1978 experience, \"-.estern banks managed to increase their securities portfolios in the face of strong loan demand, expanding their holdings of agency and municipal debt to provide a liquidity cushion as well as collateral for public deposits and other such liabilities. STRONGLOAN EXPANSION Business loans increased 14 percent during the year, and the pace was even stronger before the Fede ral Reserve's cred it-tightening move s of October 6. But thereafter, borrowers became more cautious when faced with a 153/4-percent prime rate, and lenders became more cautious because of the extra costs of funding loan growth under the new marginal reserve requirement on "managed liabilities." Most industry groups substantially expanded their borrowings at \"-.estern banks during the year. By size, the heaviest borrowers were "middle market" firms-those small and medium -sized firms which must rely primarily on bank financing for expansion and working capital. \"-.estern banks, unlike Eastern banks, experienced little increase in borrowing by large corpora tions ; many such firms apparently continued to rely heavily on the commercial-paper market, where funds were available at lower cost. Despite the downturn in new housing activity, real -estate financing remained very strong-at least at banks if not other financial institutions-until record mortgage rates and housing prices began to take their toll in late 1979. The 23-percent gain in District banks' mortgage portfolios was exceeded only by the massive 29-percent gain of the previous year. The heaviest financing activity occurred in connection with the construction of conventional single-family housing, but farm real-estate lending also grew rapidly. At year-end, outstanding mortgage loans exceeded $52 billion , at which point they constituted 37 percent of total loan portfolios. Undaunted by record levels of personal debt, households continued to draw heavily on their bank credit lines and to use bank financing for autos, mobile homes, and other big-ticket items. The borrowing pace began to slacken in the final quarter, however, as new credit extensions slowed in line with a weakening of auto sales and a more cautious mood on the part of buyers and lenders. NEW DEPOSIT SOURCE Western Bank Loans Change(%) 30 ,... ....... 25 20 15 10 5 0 1970 1973 13 1979 I/\€stern banks financed their growing loan volume by obtaining about $10 billion in new deposits, about $9 billion of which were in six-month money-market certificates (MMC's). With their rates tied to the Treasury bill rate, these certificates have helped counter disintermediation-the outflow of funds into money-market instruments-ever since their appearance in mid -1978. However, they have also attracted considerable amounts of funds from banks' own deposits, leading to an actual decline in the savings-deposit category; as a result, M M C's now ac count for about on e-fifth of District banks ' consumer-type time and savings deposits . In the second half of the year, bank s also relied heavily on large negotiable certif icates ~CD 's) to raise fun ds, as a means of meeting the strong loan demand and renewed sav ings-deposit outflows. Moreover, Western banks acquired several billion dollars more from a broad range of non deposit sources of fund s. (These sources include Federal fund s, sec urities repur chase agreements, Eurod ollars, and loans sold outright to bank holdin g companies.) For examp le, large District banks' net purchases (borrowings) in the Fed-funds market averaged over $800 million- up slightly from 1978 , but well below the 1974 peak. Until the Federal Reserv e's October 6 action , these "managed liabilities" were not su bject to reserve requirem ents. Even after that date, however, most ban~s . remained under their reserve-free limit, and thu s were able to avoid the additional reserve requirement. Fede ral Reserve memb er banks in the lAest meanwhile took more advantage of their borrowing privilege at the Federal Reserve Bank of San Francisco. Discount-window borrowing reached $120 million on a daily average basis more than double the 1978 figure, although considerably le~s than. in the 1973- 74 tight-money period. This sharp increase reflected the effects of an increasingly restrictive monet ary policy , as we ll as the widen ing rate spread between two altern ative sources of funds, the Fed -funds market and the Federal Reserve's discount window. HIGHER EARNINGS Western banks' earnings rose to record levels in 1979, according to preliminary estimates. Operating income rose substantially because of heavy loan volume, plus record interest rates on commercial and real-estate lending, as was true of banks elsewhere in the nation. But Western banks also benefited from their heavy retail orientation, with a large proportion of high-yielding consume r and mortgage loans in their portfolios, even though rates on such loans did not rise as fast as the prime. Offsetting these income gains somewhat were dramatic increase s in bank costs, especially the cost of new funds. Rates on large CD's, Eurodollars, Federal funds, repurchase agreements and money market certificates all reached record levels during 1979. Within the deposit category, interest expense also rose as individuals shifted their funds out of passbook savings and fixed-rate tim~ certificates into the more costly variable rate MMC's. Moreover, Western banks in particular, with their heavy concent~at ion of savings deposits, keenly felt the Impact when regulatory authorities raised the ceiling rate on such deposits by 1/4 percentage point in July. However, the cost of these consumer deposits was still well below the cost of large CD's. may increase in the eve nt of.a ~I~wdown cause d decline in corporate liqu idlty. Loan demand from the househol d sector shou ld weake n, as a reflection of a mor e sluggish buying pace for housin9 and . consumer durables. In 198 0, as In earlier periods of reduced business activity, consumers may be expected to pu~ n:ore emphas is on reducing debt and buildin q up savings. On the liability sid.e, meanwhil e Western banks Will pro bab ly continue u ~ing money-market cert ificates as a major source of funds. Revenues may decli ne somewhat because of both a reduction in loan growth and a drop in the return on those loans, yet for Western banks at leas.t, that declin e should be cushioned by their disproportionately large holdings of high yielding mortgage and consumer loans . On the other hand, bank s' interest expense also would be redu ced if . money-market rates decline. In th i~ situation, banks may be abl e to m alnt a l ~ or even improve the spread betwe en their return on assets and thei r cost of funds -althoug h any increase in margins could be partly offset by an expected increase in loan losses and loa n delinq uencies . But in the last analysis, Western banks' earnings should expand faster than the earnin gs of their national counterparts, simply beca use of the likelihood of a stronger busin ess environment in the West than elsewhere. UNCERTAIN OUTLOOK ., A slo wdown in the regional economy would spell a more uncertain climate for lAestern commercial banking in 1980. Banks should experience a deceleration from last year's strong lending pace, although lending to the busin ess sector 14 Management Committee (Shown fro m left to right) Kent O. Sims, Senior Vice President, District Departments John J. Balles, President John B. Williams, First Vice President John J . Carson, Senior Vice President, Corporate Staff 15 Federal Reserve Bank of San Francisco Organization Chart January 1, 1980 District Departments Vice President BanI< & Community Relations Vice President Statistical & Data Serv. Robert C. Dietz Wilhelmine von Turk Vice President & Assoc . Director of Research Joseph R. Bisignano Director t--._~ Credit & COflSumer Affairs W. Gordon Smith BanI< & Community Relations Officer ,Vl.arion E.Otsea Examining Officer Commercial-S.F. Research Officer Peter Hsieh wavne l . Rickards Computer Services Research Officer Herbert R. Runyon Operations Vice President Compuler Operations Hector M. Martin Asst.Vice Pres. Systems DavidQ.Ong Operations Officer Electronic PaymentsOffIC PatrickTong lamesC. Warren 1 I Salt Lake City Asst. VK:ePres . Expenditures & Quality Control DouglasO. Knudsen VICe President Salt LlkeCity A. Grant Holman Asst. Vice Pres. Custody Control Don W . Sheets Payments Services Offker Rohert R. Richards 16 Assistant Gene<alAuditors Beverly J.Adams Bruce H. Thompson lace W Langhorne Corporate Staff Secretary's Office Senior VICePresident Corporate Staff john I.Carson Facilities Planning District ecurity Vice President & General Counsel l ou is E. Reilly Director FacilitiesPlanning Oren L. Christensen Asst. VICe Pres. FacilitiesPlanning legislative Analyst William K. G inter Assoc.General Counsel William l. Cooper verle B. Johnston Asst. Vice Pres. Admin. ServicesOffKer James J.Teoge LosAngeles Operations Support Officer Carl E. Powell I \ VICePresident Portland Portland Seattle Angelo S. Carella Asst. Vice Pres. Analysis-Control H. William Pennington Asst. Vice Pres. Operations M. Timothy Carr Asst. VicePres. Check Collection Kenneth l. Pe terson Admin.Servicesomcer Dean C. Gonnerman 17 Asst. Vice Pres. Analysis& Control Gale P.Ansell Branch Operations (Shown from left to right) A. Grant Holman , Vice President, Salt Lake City Angelo S. Carella, Vice President, Portland H. Pete r Franzel , Vice President, Opera tions Support Richard C. Dunn . Senior Vice Presiden t, Los Ange les Ge rald R. Kelly, Senior Vice President. Seattle 18 WESTERN CENTRAL BANK Durin g 1979, the Federal Reserve Ba nk of San Francisco provi ded ex panded central-bank services-in the areas of checks , coin, currency, fiscal agency, and electron ic funds tra nsfer s-for a regional economy which continued to gro w at a faster pace than the rest of the nation. The Twelfth District, which contains five Reserve Bank offices (San Fran cisco , Los Angeles, Portland, Salt Lake City and Seattle) is the largest Federal Reserve District in terms of both population and geograph ic size . It includes the states of Alaska, Arizona, California, Hawaii , Idaho, Nevad a, Oregon, Utah and Washingt on , plus the ter ritories of Guam and Americ an Samoa, and it serves 351/ milli on people and 625 banks wit h a 2 total of 7,114 banki ng offices . The Res erve Bank's scope of operations in 1979 reflected the large size of its service area. For example, Bank staff handled about 1.5 billion paper checks, not to mention 1.9 billion coins and 1.4 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 directdeposit programs, and the Federal Reserve wire-transfer network. District member banks transferred $8 .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. MEMBERSHIP DEVELOPMENTS System generally. In this District, the number of member banks remained almost stable, as 7 state -chartered banks became members while 10 banks went off the membership rolls. However, deposits held by banks withdrawing from membership exceeded the deposits gained from new members, primarily because most of the latter group were small, newly organized institutions. The System nation-wide exp erienced a net loss of more than 75 memb er bank s during the year. As these numbers suggest, it has become increasingly diffi cult to maintain membership in a situa tion where memb er banks (unlike nonmember institutions) cannot earn a return on their required reserves. Both the Ho use and the Senate held lengthy hearings on this subject during the year, but failed to act on final legislation before year-end. The bills under consideration generally would reduce the number of institutions subject to reserve requirements, but would extend the principle of coverage to all those that handle ch eck-like transactions accounts. Proposed legis lation also would provide wider access to discount-window borrowing and other Federal Reserve services, but in addition would impose charges for Fed services. During the year, the Reserve Bank's bank relations personnel organized meetings for bankers throughout the District, to explain the reasons for the System's legislative proposals and the need for a strong and independent central-banking system . In addition, they worked to solve bankers' problems by providing technical advisory services for member banks , cost-of-membership studies for potential Declining membership became a problem for the San Francisco Reserve Bank, as it had been earlier for the Federal Reserve 19 members, and a series of seminars on econom ic and financial developments for banking and business audiences. The Reserve Bank continued to offer member banks a functional-cost analysis program , which take s advan tage of the Federal Reserve 's unique ability to construct regional and national peer-group comparisons from accounting data supplied by its members. To supplement the basic System program, which is designed primarily for small and medium sized institutions, the San Francisco Bank developed a special program for the large banks which characterize this District. SUPERVISORY RESPONSIBILITIES In the area of supervision and regulation , the Reserve Bank began takin g on new responsibilities conferred by the International Banking Act of 1978, which extended Federal control over the branches and agencies of foreign banks operating in this country. Reserve Bank personnel cooperated with other Federal bank-supervisory agencies and various state agencies with compliance responsibilities under the Act-for example, by helping to develop a uniform examination report for nation-wide use, and by working with the California State Banking Department on plans for a joint examination of California agencies of foreign banks in 1980. Bank personnel also became heavily involved in the Fed eral Reserve's first significant revisions in 15 years of its Regulation K (International Banking Operations). Again , the Bank participated in the important work of the Inter-Agency Country Exposure Risk Committee, which evaluates on a uniform basis the.relative risk of extending credit to public and /or private entities in some 75 countries throughout the world. During 1979, the Reserve Bank received 142 bank holding-company applications for ana lysis and processing, along with 58 other app lications invo lving structure changes as well as 33 app licat ions fo r foreign activitie s. The app lications staff maintained close communication with active hold ing companies and other applicants, and provided inter pretations and advice to those wishing to expand or restructure their operations. In 1979, the Federal Reserve System as a whole bega n its first year of operation with a standardized inspection report and un iform rating system , somewhat along the lines of the inspection program deve loped earlier by the San Francisc o Reserve Bank. This Bank adopted a policy in 1976 of scheduling the inspection of major hold ing companies concurrently with the ex amination of their princi pal subsidiary bank by this or other regulatory agencies. The poli cy achieves some effic iencies by poo ling knowledge among all of the bank regulatory agencies involve d in the supervision of each holding-company family, while even greater savings are rea lized by the holding companies and banks be ing examined . The Fed's Board of Governors has formally adopted this policy for implementation System -wide during 1980. CREDIT, CONSUMER ACTIVITIES Following a recent System policy change, the Bank established guidelines and implemented procedures permitting member banks to pledge residential mortgage loans and municipal obligations at the discount window, yet reta in physical possession of paper representing this collateral. The Bank, a long -time advocate of such "off-premises custody" arrangements, was among the first in the System to institute these procedures. In a related action , the System formally provided for the acceptance of foreign paper as discount-window collateral , in line with procedures adopted at this Reserve Bank several years ago. San Franc isco held more than three -fourths of the foreign collateral pledged at all Reserve Banks during 1979. These policy changes helped expand the pool of collateral availab le for discount-window borrowings, and reduced the adminis trative burden associated with banks' pledging of collateral. The consumer-affairs staff conducted examinations at all state -member banks, and also at about one -third of the ir branches, in line with an expanded System -wide program des igned to achieve broad -based compliance with consumer-protection laws and regulations. In addition, the staff conducted formal advisory programs for member banks , as part of a service in which specially trained exam iners prov ide on-site educational and advisory work . The Reserve Bank received 604 individual consumer complaints against commercial banks , and of that total , processed 138 complaints which were related to institutions for which the Bank is the primary supervisor. Also, the staff received several thousand requests for information from the general public, many of them in response to a series of Bank produced public -service announcements on consumer regulations, which were shown on a number of television stations in the District. COMPUTER DEVELOPMENTS The Bank continued to implement a long range automation plan , which calls for District-wide standardization and centralized processing of most 20 operations, with all five District offices tied together via a modern computer network operated out of the San Francis co data center. All offices now have centralized services available in certain areas, such as tax-receipt processing and some savings- bond processing . Majo r automation projects completed in 1979 included a District-wide central adjustments system to hand le account reconciliations with member banks , a high-speed telecommunications system which provides better message-switching services between member banks , mo nitoring programs to help manage check-processing float, and a new system to handle the in creased reporting burden associated with banks' foreign -exchange operations. In a major ongoing project, the Bank continued development work on a sophisticated system to handle the processing of financial reports received from banks and other financial institu tions. The increasing num ber of reports and respondents, in addition to the increasing vis ibi lity and sensitivity of the monetary aggregates which are drawn from these data, make completion of this project our highest priority effort . Data processing and fiscal personnel continued work on the automation of a Treasury-securities inventory and transfer system (called SHARE). San Francisco is the lead district on this project, which will provide a standardized on-line database fiscal-computer application servicing 13 offices in the Kansas City, St. Louis and San Francisco distr icts. This is the first large-scale joint automation project undertaken within the Federal Reserve System . PAYMENTS SERVICES In the chec k-processing activity , Bank staff handled 1.3 billion pape r checks dur ing the year-a subs tantial6-percent in crease . With continued technological and operational improvements, check personnel mai ntai ned the highest check processing productivity in the Federal Reserve System . At the same time , the quality of operations was signi fican tly improved. As a result , internall y generated errors whi ch require costly and time-consuming adjustment were reduced by more than 35 percen t. In 1979, as in earl ier years , the fastest growing means of payment was electronic. While check -processing activity increased 6 percent, wire funds transfers increased 23 percent, and automated clearinghouse (ACH) and government deposit activity jumped 44 percent. In dollar terms , District member banks settled a massive $8.9 trillion through the Federal Reserve 's wire-transfer system during the year. But the sharpest percentage gain occurred at automated clearinghouses, which move funds by electronically-transmitted payment instructions that take the place of Checks and Wire Transfers 4 .... .... 3 2 OL-........L-~~~I....I ..... 1970 1973 1976 1979 pape r checks. The Bank expa nded ACH operations to a 24-hou r per day processing schedule in Octobe r, as part of a System effort to attrac t add itional volumes by setting schedules more accommodating to corporate originators. In cooperation with the Treasury Department, the Bank comple ted implementation of a governmen t-check truncation program which had been instituted in 1978. Truncation involves shipping magnetic tapes and microfilm cop ies of checks, instead of the original paper checks in bulk, to the Treasury computer-operations center, enhancing speed and control. This effort was a major accomplishment, as the San Franc isco District processes the largest volume of government checks in the System 124 million in 1979. CASH AND FISCAL ACTIVITIES Despite the increase in check usage and the rapidly acce lerating growth in electron ic payments , the Reserve Bank continued to handle substantial amounts of coin and currency in 1979. Altogether, it received and counted 1.9 billion coins and processed 1.4 billion pieces of currency during the year. Currency verification decreased by 45 percent, reflecting several major efficiencies which were adopted in 1978. For examp le, commercial banks now depos it excess fit currency in sealed plastic bags, so that the currency can then be paid out to the same bank without the need for Reserve Bank verification and counting. In another major advance, the Bank installed three high-speed currency machines in 1979, and will install three more in 1980. Each machine has an opt imum feed rate of 1,200 notes a minute, and is capable both of detecting counterfeits and of destroying, on line, those notes which do not rneetfitness standards. Overtime, the 21 new equipment will help red uce staff in this labor-intensi ve activity, and will also improve processing efficiency. In the coin area, the major activity centered aroun d the release of the Susan B. Anthony dolla r coin, which was made availab le to the public on July 2, 1979. This Bank distributed about 65 million coins to District financial institutions, representing one-fourt h of the total volume distributed nationwide. Demand for the coin fell off considerably after the initial release . However, the Treasury and Federal Reserve System have continued to promote the coin , maintaining that over all savings of $50 million a year could be realized by replacing the present pool of dollar bills with Anthony dollar coins . In its role as fisca l agent for the U.S. Government, the Reserve Bank handled substantial amounts of public debt instruments in the form of sav ings bonds, marketable Treasury securities and food stamps. Activity in marketable securities increased 25 percent in volume , reflecting investor attraction to the double-digit interest rates offered on such issues. At the same time , the Bank worked to improve computer handling of securities through such means as the aforementioned joint automation project with the Kansas City and St. Louis Districts. The Bank completed implementation of the Treasury-designed tax-and -Ioan investment program . Under this arrangement, the Treasury earns interest by investing its operating cash balances while paying fees for certain services which it former ly rece ived free from financial institutions. Other changes in fiscal processing included revisions to the savings-bond program . First, the Treasury accelerated payments for savings bonds sol d by financial institutions acting as issuing agents. Second, it announced two new series of savings bonds, EE and HH, to replace the current E and H bonds . IMPROVED PRODUCTIVITY The San Francisco Reserve Bank operated at the second highest level of cost effectiveness in the System, wit h an aggregate unit cost 9 percent below the System average. Productivity (output per worker-hour) in these operational activities has increased 65 percent in the past five years. The Bank achieved this performance while experiencing only slight increases over 1974 unit-cost levels, despite sharply rising costs of salaries, materials and equipment. Lastly, and of most far-rea ching consequence to the Bank's operations, work has begun on a new 12-story, 653,000-square foot building on San Francisco's Market Street. Ground breaking is schedu led for early 1980 and the build ing should be ready for occupancy in 1982. The Bank 's future productivity would be hampered if it were to continue operating at its present headquarters building, which was built in the 1920's and is small and inefficient from the standpoint of 1980-style banki ng operations. In addition to modern ope rations facilities, the new building will house a major economic-education exhibition treating principles of economics, the growth of the W3stern financial community, and the Federal Reserve 's role in the reg iona l and national economies. SUMMARY OF OPERATIONS Dollar Value (Millions) 1978 1979 Volume (Thousands) 1978 1979 Custody Services Cash services Currency paid into circulation Coin Fiscal Agency services Savin gs Bonds Other Treasury issues Currency verified and destroyed Food coupons N/A 264 N/A 274 1,281,416 1,818,775 1,408,121 1,889,231 1,909 1,007,721 2,176 1,006 1,709 1,006,206 2,264 792 25,224 340 343,990 263,684 35,163 424 345,188 223,232 569,335 71,389 6,835 725 ,195 88,190 9,712 1,283,807 133,593 17,956 1,358,985 124,570 20,223 7,871,414 1,674 7,185 8,930,438 2,562 9,960 3,123 3,171 20,341 3,847 7,130 26,790 12,073 N/A 28,952 N/A 1,318' 59' 3,698 2,760 914' 60' 213 Payments Mechanism Check Processing Commercial check s Government checks" Return items Electronic Funds Transfer Wire transfers Automated clear inghouse Government deposits Discounts and Advances Total discounts and advances Number banks accommodated Noncash Collections , Actual figures " Including postal money orders 22 176 Twelfth Federal Reserve District e o . ' . . ., . . • ... .. .... . ' 23 , DIRECTORS SAN FRANCISCO The Federal Reserve carries out its central-banking functions 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 Directors. 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 Federal Reserve directors bring management expertise to the task of overseeing Reserve Bank operations. They also provide first-hand information on key economic developments in various areas of the District, complementing the Bank's internal research efforts. In addition, Board members 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, subject to review and approval by the Board of Governors. Ole R. Mettler President and Chairman of the Board Farmers & Merchants Bank of Central California Lodi , California Cornell C. Maier Chairman, President and Chief Executive Officer Kaiser Aluminum & Chem ical Corp. Oakland, California Clair L. Peck , Jnr . Chairman of the Board C.L. Peck Contractor Los Angeles, California Caroline Leonetti Ahmanson, Deputy Chairman Chairman of the Board Caroline Leonetti Ltd. Hollywood, California Malcom T. Stamper President The Boeing Company Seattle, Washington Alan C. Furth President Southern Pacific Company San Francisco, California J.R.Vaughan Chairman, President and Chief Executive Officer Knudsen Corporation Los Angeles, California Frederick G. Larkin, Jr. Chairman of the Executive Committee Security Pacific National Bank 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 - ....... 0' .; 24 Maier Furth Ahmanson Larkin Peck Vaughan Mettler Stamper Young 25 Schmidt LOS ANGELES Chairman of the Board Harvey A. Proctor Chairman of the Board Southern California Gas Company Los Angeles, California Fred Andrew President Superior Farming Company Bakersfield , California James D. McMahon President Santa Clarita National Bank Newhall, California Bram Goldsmith Chairman of the Board City National Bank Beverly Hills, California Harvey J. Mitchell President First National Bank of San Diego County Escondido, California Lola McAlpin-Grant Assistant Dean Loyola Law School Los Angeles, California Togo W. Tanaka President Gramercy Enterprises Los Angeles, California 26 PORTLAND Chairman of the Board Loran L. Stewart Director Bohemia, Inc. Eugene, Oregon Merle G. Bryan President Forest Grove National Bank Forest Grove , Oregon Phillip W. Schneider Northwest Regional Executive National Wildlife Federation Portland, Oregon Jack W. Gustavel President and Chief Executive Officer The First National Bank of North Idaho Coeur d'Alene , Idaho Kenneth Smith General Manager The Confederated Tribes of Warm Springs Warm Springs, Oregon Jean Mater Vice President Mater Engineering Ltd. Corvallis, Oregon Robert F. Wallace Chairman of the Board First National Bank of Oregon Portland, Oregon / SALT LAKE CITY Chairman of the Board Wendell J . Ashton Publisher Deseret News Publishing Company Salt Lake City , Utah Robert E. Bryans Chairman of the Board Walker Bank & Trust Company Salt Lake City, Utah Mary S. Knox Chairman of the Board Idaho State Bank Glenns Ferry, Idaho Robert A. Erkins Geothermal Agri/Aquaculturist White Arrow Ranch Bliss, Idaho Fred H. Stringham President Valley Bank and Trust Company South Salt Lake City, Utah David P. Gardner President University of Utah Salt Lake City, Utah J. L. Tertel ing President The Terteling Company, Inc. Boise, Idaho 28 SEATTLE Cha irman of the Board Lloyd E. Cooney President and General Manager KIRO-Radio & Television Seatt le, Washington ./ Merle Adlum President Puget Sound District Council , Mar itime Trades Dept. AFL-CIO Seatt le, Washington Donald L. Mellish Chairman of the Board National Bank of Alaska Anchorage, Alaska C. M. Berry President Seafirst Corporation and Seattle-First National Bank Seattle, Washington Virginia L. Parks Vice President for Finance and Treasurer Seattle University Seattle, Washington Douglas S. Gamble President and Chief Executive Officer Pacific Gamble Robinson Company Seattle, Washington Rufus C. Smith Chairman of the Board The First National Bank of Enumclaw Enumclaw, Washington 29 COMPARATIVE STATEMENT (Thousands of Dollars) December 3 1, 1979 1978 Assets Gold certificate account Special Drawing Rights certificate account Federal Reserve notes of other Federal Reserve Banks Other cash . . . . 1,299,982 152,000 - 031,312 670 ,016 211,000 -0 60 ,642 Loans to Member Banks : Secured by United States Government & Agency obligations Oth er eligible paper Other paper . . . 214, 500 38 ,100 -0 - 36,500 -0 84 ,100 Federal Agency ob ligations . 1,046 ,745 1,080,827 United States Government securities : Bills Notes Bonds . . . 5,589,142 7,272,340 1,652 ,506 5,952,159 7,432,314 1,914,520 Total United States Government securit ies Total loans and securities . . 14,513,988 15,813,333 15,298 ,993 16,500,420 Cash item s in process of collection Bank premises Operating equipment . . . 2,031,377 9,698 8,555 3,778,14 1 11,105 10,497 . . 224 ,700 1,507 ,133 349,962 459 ,492 . 21,078,090 22 ,051 ,275 Fede ral Reserve notes . 12,132,792 13,193 ,695 Deposits: Total Member bank-reserve accounts United States Treasurer-general account _ Foreig n Other deposits _. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. _ . . . . 7,102 ,592 594,391 28,378 64,451 7,290,498 337,362 42,159 121,199 . 7,789 ,812 7,791,2 18 . . 559,035 291,977 193 ,520 508,166 . 20 ,773,616 21 ,686,599 . . 152,237 152,237 182,338 182,338 . . 21,078 ,090 -0 22 ,05 1,275 - 0 Other assets: Denominated in foreign currenc ies All other _. _ Tota l assets Liabilities Total deposits _ _ Deferred availability cash items _ Othe r liabilities Totalliabilities Capital accounts Capital paid in Su rplus _ _ _ Total liabilities and capital accounts Con tingent liability on acceptances purchased for foreign correspondents 30 _ _. __ EARNINGS AND EXPENSES (Thousands of Dollars) December 31, 1978 1979 Current earnings _.. . _.. _ . 1,095,971 1,345,762 66,460 6,044 71,031 6,582 _.. Total current earnings 12,644 1,323,391 9,684 43 _. . 60,416 64,449 . 1,035,555 1,281,313 . . . - 0 - 0 685 - 0 - 0 1,081 . 685 1,081 . . . 70,79 5 17,262 239 515 20,272 920 88,296 21,707 . . . . _ - 87,611 - 7,488 940,456 8,881 923,936 - 20,626 - 7,330 1,253,357 10,330 1,212,926 . _. . . _ 3,895 1,091,753 270 53 . Discounts and advances United States Government securities Foreign currencies All other 7,639 144,598 152,237 30 ,101 152,237 182,338 _ Current expenses _ Total current expenses Less reimbursement for certain fiscal agency and other expenses . Net expenses Profit and loss Current net earnings _ _ _ Additions to current earnings : Profit on sales of United States Government securities (net) Profits on foreign 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 ded uctions .. _ _ Net additions ( +) deductions (- ) _ Assessments for expenditures of Board of Governors Net earn ings before payments to United States Treasury _ Dividends paid _ Paymen ts to United States Treasury (interest on Federal Reserve notes) .. _ Transferred to surp lus Surplus January 1 Surplus December 31 31 _ _ San Francisco Branch P.O. Box 7702, San Francisco , Cal ifornia 94120 Los Angeles Branch P.O. Box 2077, Terminal Annex , Los Angeles, Californ ia 90051 Portland Branch P.O. Box 3436, Portland, Oregon 97208 Salt Lake City Branch P.O . Box 30780, Salt Lake City , Utah 84125 Seattle Branch P.O. Box 3567, Terminal Annex, Seattle, Washington 98124 Note : The graphics on pages 23-29 were prepared by Walter Thomason and Associates for wall displays in the assembly room of the Federal Reserve Bank of San Francisco. The graphics show persons and places associated with the history of each of the five geographic areas served by the San Francisco Reserve Bank . Produced by William M. Burke, Vice President, Economic Information, and Karen B. Rusk, Manager, Publications and Graphics; Graphics designed by William Rosenthal, Graphic Artist; Federal Reserve Bank of San Francisco. 32