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National Scene



Western Business


Western Banking


From the Boardroom

Western Central Bank




E-ederal Reserve Bank
of San Francisco
FEB 25 1



Joseph F. Alibrandi
Chairman (1979)

John J. Balles


Cornell C. Maier
Chairman (1980)



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.


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
February 1, 1980


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 .


Real Growth and Inflation
Change (%)


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






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.


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
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


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.

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


3 .-


o ......,.-.....iIIrt-lH----I

Consumer Price Change


- 1



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.




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



o 1oo-~1...I""'1..01""""""...&.'"




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

- 20
- 30 L-.&...&..L.L.............~..,.

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.

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


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.

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




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.

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






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

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.





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 ....





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.


o ~---......_ - - -...
-2 ....................&....&.....................

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 .


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




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.


Sources of Demand
$ Billio ns

30 ...





Defense contracts

0--.. . .-.-----.. . _-­





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 ,


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

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.

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

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.


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 .

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.

On balance, 1979 turned out to be a rather
solid year for the \IoA3stern economy, but
1980 could be somewhat more somber.


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.



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.

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


Western Bank Loans

30 ,...






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.


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.

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


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


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


Credit & COflSumer Affairs
W. Gordon Smith

BanI< & Community
Relations Officer

,Vl.arion E.Otsea

Examining Officer

Research Officer
Peter Hsieh

wavne l . Rickards

Computer Services

Research Officer
Herbert R. Runyon


Vice President

Compuler Operations

Hector M. Martin

Asst.Vice Pres.



Operations Officer

Electronic PaymentsOffIC


lamesC. Warren


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




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

Oren L. Christensen

Asst. VICe Pres.

legislative Analyst

William K. G inter

William l. Cooper

verle B. Johnston

Asst. Vice Pres.

Admin. ServicesOffKer
James J.Teoge


Operations Support Officer
Carl E. Powell






Angelo S. Carella

Asst. Vice Pres.
H. William Pennington

Asst. Vice Pres.

M. Timothy Carr

Asst. VicePres.

Check Collection

Kenneth l. Pe

Dean C. Gonnerman


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


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
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.



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


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.

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.

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.

The Bank continued to implement a long­
range automation plan , which calls for
District-wide standardization and
centralized processing of most


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
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 .


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 ....








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.

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


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
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 .

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

Dollar Value


Custody Services
Cash services
Currency paid into circulation
Fiscal Agency services
Savin gs Bonds
Other Treasury issues
Currency verified and destroyed
Food coupons










725 ,195













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




Federal Reserve District

o .






... .. .... .





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

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
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
The Boeing Company
Seattle, Washington

Alan C. Furth
Southern Pacific Company
San Francisco, California

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

- .......















Chairman of the Board
Harvey A. Proctor
Chairman of the Board
Southern California Gas Company
Los Angeles, California

Fred Andrew
Superior Farming Company
Bakersfield , California

James D. McMahon
Santa Clarita National Bank
Newhall, California

Bram Goldsmith
Chairman of the Board
City National Bank
Beverly Hills, California

Harvey J. Mitchell
First National Bank of
San Diego County
Escondido, California

Lola McAlpin-Grant
Assistant Dean
Loyola Law School
Los Angeles, California

Togo W. Tanaka
Gramercy Enterprises
Los Angeles, California


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

Merle G. Bryan
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


Chairman of the Board
Wendell J . Ashton
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
Valley Bank and Trust Company
South Salt Lake City, Utah

David P. Gardner
University of Utah
Salt Lake City, Utah

J. L. Tertel ing
The Terteling Company, Inc.
Boise, Idaho


Cha irman of the Board
Lloyd E. Cooney
President and General Manager
KIRO-Radio & Television
Seatt le, Washington

Merle Adlum
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
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


(Thousands of Dollars)
December 3 1,

Gold certificate account

Special Drawing Rights certificate account

Federal Reserve notes of other Federal Reserve Banks

Other cash


- 031,312

670 ,016
-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 -

-0 ­
84 ,100

Federal Agency ob ligations


1,046 ,745


United States Government securities :





1,652 ,506


Total United States Government securit ies

Total loans and securities



15,298 ,993

Cash item s in process of collection

Bank premises

Operating equipment



3,778,14 1


224 ,700
1,507 ,133

459 ,492



22 ,051 ,275

Fede ral Reserve notes



13,193 ,695


Total Member bank-reserve accounts

United States Treasurer-general account

Foreig n

Other deposits
_. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..	 _


7,102 ,592



7,789 ,812

7,791,2 18



193 ,520


20 ,773,616

21 ,686,599





21,078 ,090

22 ,05 1,275
- 0­

Other assets:

Denominated in foreign currenc ies

All other

_. _

Tota l assets


Total deposits



Deferred availability cash items _
Othe r liabilities


Capital accounts
Capital paid in
Su rplus



Total liabilities and capital accounts

Con tingent liability on acceptances purchased for foreign correspondents



_. __	


(Thousands of Dollars)
December 31,

Current earnings
_ .






Total current earnings


_. .







- 0­
- 0­

- 0­
- 0­





70,79 5





- 87,611
- 7,488

- 20,626
- 7,330

_. .




Discounts and advances
United States Government securities
Foreign currencies
All other


30 ,101


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



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.