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Inflation and High Interest Rates
. . . Reserve Bank P resident presents fo u r m ajor policy
recom m endations in House Banking C om m ittee testim ony.

Income Growth and Unemployment
. . . Com pared with early postw ar, high incom e grow th is
now less like ly to produce very low unem ploym ent.

Summary Description of ISBAR
. . . M ajor re g u la to ry agencies atta ck reporting problem s
w ith “ Inform ation System fo r Banking Agency R eports.”

The Business Review is edited by William Burke, with the assistance of
Karen Rusk (editorial) and Janis Wilson (graphics).
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the Research Information Center, Federal Reserve Bank of San
Francisco, P.O. Box 7702, San Francisco, California 94120. Phone
(415) 397-1137.

Problems of Inflation
and High Interest Rates
John J. Balles, President
Federal Reserve Bank of San Francisco
Testimony before House Committee
on Banking and Currency
Washington, D.C., July 17, 1974
Mr. Chairman, I appreciate this opportunity
to share my thoughts on basic monetary problems with this Committee. I will attempt to set
forth and analyze what I believe are the major
issues and the appropriate policies to deal with
them. In that context, I will deal with the questions you raised in your letter of June 19.t *

World-wide problem
As you are aware, the problems of rampant
inflation and extremely high interest rates are
not restricted to the United States. All of the
major industrial countries are experiencing similar, or even higher rates of inflation, and the
high interest rates which go with these rates of
inflation. A significant share of our current inflation results from the fact that the prices of
many basic goods-such as oil, wheat, cotton,
and. lumber-are determined in the international market place, rather than in the U.S.
market alone. Thus, worldwide inflation acts to
exacerbate and complicate our domestic irrliation problem. For similar reasons, the resolution of our current inflation· and high interest
rate problems does not lie completely within
our hands, but rather requires the cooperation
of the major industrial countries of the world.

As you pointed out in calling these ,hearings,
two of the most serious problems currently facing the U.S. economy are an unprecedented rate
of peace-time inflation and a record high level of
interest rates. The present inflation is especially
pernicious because many of the largest price increases have been for necessities such as food,
housing and fuels, so that the poor and those
living on reduced retirement income have been
the hardest hit. Such perverse effects of inflation
tend to negate the attempts of the government
in recent years to assist such groups with direct
government programs. Similarly, it is clear that
the current high level of interest rates has
created serious dislocations and strains in our
economy. These include the adverse impact on
the housing market, the large capital losses to
those persons in all walks of life who have put
their savings into stocks and bonds, directly or
through mutual funds and pension trusts, and
the threat to the liquidity of financial institutions.

What has led to this unprecedented worldwide inflation? Some observers would cite excessive monetary and fiscal expansion as the
major immediate cause. But since I do not believe that governments and central banks act
out of blind ignorance or perverse motives, we
must consider the social and political climate
which tends to produce a bias toward inflationary policies. One major factor appears to be the
increasing pressure on the world's available resources which has been created by a growing
and more affluent population with ever-rising

*Footnotes at end of article.

expectations for a higher standard of living.
Another key factor appears to be the increased
priority that governments have assigned to
achieving a fully employed economy, both here
and abroad, since World War II. Given this
priority, governments have committed themselves to ongoing, expansionary domestic policies to prevent "unacceptable" levels of unemployment from developing. These secular
developments have tended to create an underlying inflationary bias in government policies
throughout the world.

domestic unemployment. The consequent intervention in foreign-exchange markets by other
governments substantially increased the domestic money supply in these countries as they
bought dollars by issuing their own money
through central bank operations. Thus the wellpublicized dollar overhang was matched by foreign monetary expansion. Simultaneous monetary expansion in all major industrial countries
helped to foster a simultaneous business-cycle
boom around the world, which aggravated the
inflation from which we all now are suffering.
Having noted the worldwide inflationary climate, I would now like to turn to a more
specific analysis of the underlying factors that
have produced rampant inflation in the United
States, even in the face of a softening in economic activity. It may be helpful to put this
problem in historical perspective, before attempting to assess possible cures.

The cultural and economic forces generated
over the past three decades have provided the
basis for our present inflationary experience,
but they do not explain why serious worldwide
inflation occurred in the first half of the 1970's,
rather than the second half of the 1960's, or at
some other period. The reasons for the timing
of our problems are complex. However, one
element which has not r((ceived as much attention as it deserves is the breakdown of the Bretton Woods System, and the decline in recent
years in foreign confidence in the U.S. dollar.
Inthe years from the end of World War II until
the mid-1960~s, the world looked on the U.S. as
the strongest and most stable country, and the
dollar as the strongest and most stable currency.
As a result, both foreign governments and private persons tended to accumulate dollar assets.
But as the U.S. sUffered an almost unbroken
string of deficits in our balance of payments,
and as the U.S. inflation rate gradually accelerated in the late 1960's towards 6 percent, confidence in the dollar weakened, and there was an
incentive to switch out of dollars into other currencies.

Effect of budget deficits
Our domestic inflation problem owes much
to the fact that the Federal Government in the
United States has run deficits in 14 of the last
15 fiscal years. These deficits, which occurred
in all phases of the business cycle, have ex-

Inflation problem reflects continued deficit
spending, especially in recent years

"Billions of Dollars

5..------------------.

This movement out of dollars accelerated in
the period after the U.S. suspended convertibility of the dollar into gold in August, 1971. The
movement only came to a halt in March 1973,
when most industrial countries floated their exchange rates, and thereby rang down the curtain
on the Bretton Woods system of fixed-exchange
rates. 2 In the period up to March 1973, foreign
governments resisted an appreciation in value
of their own currencies vis-a-vis the dollar because they believed that it would hurt their
export industries, slow their growth, and create

o
-5
-10
-15

-20
Deficit
- 25 L-.L-...l.-.....L...-.L......J.--J'--L-.l-~...L.....J.......J._I._I
1970
1975
1961
1965
Fiscal Year

panded the Federal debt by $193 billion, or 67
percent since 1959. Federal deficits became an
especially critical problem with the major escalation of the Vietnam war in mid-1965. The size
of these deficits increased at an alarming rate
during the Vietnam build-up period between
1966 and 1968 when the economy was at, or
near, full employment. The fiscal situation was
temporarily relieved by the belated income-tax
surcharge inmid-1968, and by a leveling off in
military expenditures at about the same time.
However, .the situation deteriorated further in
1969-70 when outlays for civilian programs
outstripped recession-reduced revenues, and
became still worse in the 1971-73 period when
a full-blown expansion got underway.

It has been my observation that large and
persistent Federal deficits are a major factor in
pulling monetary policy off course, in the direction of excessive monetary expansion, as the
central bank attempts to cope with the conflicting pressures that develop. Too often in practice, therefore, an expansionary fiscal policy
tends to generate excessive expansion in money
and credit.

Priority of employment goal
The second major factor tending to inhibit
the use of monetary policy in combatting inflation is the conflict in national goals that often
occurs as between "full employment" and stable
prices. Since the early 1960's, the "full employment" goal in the U.S. generally has contemplated an unemployment rate of 4 percent or
less. Such a rate was regarded by many as a
practical minimum, in view of the normal shifting of workers between jobs and the lack of
marketable skills of some job-seekers. Whenever the conventional or aggregate unemployment rate has exceeded 4 percent, pressures
have developed for expansionary monetary and
fiscal policies. For example, recently there have
been demands for a tax cut to take up slack in
the economy and to reduce our conventional or
aggregate unemployment rate from the 5.2 percent level that prevailed last month. Were such
policies to be undertaken, I greatly fear that
they would simply accelerate the already extremely high inflation rate in the U.S.

It can be argued that a tighter monetary policy ought to have been able to offset the inflationary effects of this large, sustained deficit
financing. In theory this may be true, but in
practice the opposite has tended to occur. When
huge Federal credit demands are added to those
of a fully-employed private sector, interest rates
tend to rise sharply. There are some sectors of
the economy, such as housing construction, and
programs financed with municipal bonds, jhat
are especially sensitive to such a development
because they depend heavily upon long-term
credit. Because high interest rates have an uneven impact on the economy, demands for relief
are quickly heard. For example, in the spring of
1973, there was a serious effort made by some
members of Congress to freeze interest rates, or
even toroll them back to the level of January 1,
1973.

In my view, there has not been enough policy
use of a refined analysis of the employment and
unemployment data, concentrating on the "hard
core" of our labor force-i.e., heads of households or "breadwinners"-for whom the social
and economic costs of unemployment are the
highest. Among this group, the unemployment
rate last month was only 3.1 percent, in contrast
to the conventional or aggregate unemployment
rate of 5.2 percent.

In short, large-scale deficit financing by the
Government tends to bring great pressures on
the central bank to keep interest rates from rising to "unreasonable," "unacceptable," or
"dangerous" levels. Unfortunately, the only way
the mounting credit demands can be satisfied
without an increase in interest rates in the short
run is for the Federal Reserve to accelerate the
growth of money and credit. But if done for too
long, or to an excessive degree, such action can
generate inflationary pressures which may persist for a long period of time and result in even
higher interest rates in the long run.

The significance of a 4 percent aggregate unemployment. rate has gradually changed over
time because of shifts in the composition of the
labor force. An earlier study by George Perry of
5

the Brookings Institution, 3 and a more recent
study by Eckstein and Brimmer for the Joint
Economics Committee4 suggest that a 4 percent
unemployment rate today represents a much
tighter labor market than it did twenty years
ago, in view of the increased participation in the
labor market by teenagers and other new entrants who also lack marketable skills. Generally, it now seems to take a higher rate of inflation to achieve a 4 percent unemployment rate
than it did some years ago, because of those factors. Thus if we should now attempt to follow a
monetary policy aimed at reducing unemployment to 4 percent, the likely consequence would
be to exacerbate present inflationary pressures,
which have already reached dangerous levels.

For whatever reason, there has been a tendency for the goal of "full employment" to take
priority over stable prices, in view of actions in
recent years by the Administration and Congress-whose job it is to determine national
priorities. Not enough attention seems to have
been paid to the trade-off~i.e., the additional
inflation that must be accepted to get a lower
unemployment rate. In essence, my argument is
that we have had both a faulty diagnosis, and in
part the wrong medicine, for the unemployment
goal. First we need a more meaningful "target
rate" for unemployment, as I have explained.
Secondly, we need new perceptions and new
remedies for structural unemployment, particularly among teenagers, minority groups and
parHime women workers.

This, of course, is not to imply that monetary
and fiscal policy should never be used to help
deal with unemployment. What it does mean is
that, because of shifts in structure of the labor
force, there may be a change over time in the
practical minimum unemployment target that
can be achieved through expansionary monetary and fiscal policies without creating an unacceptable rate of inflation. Thus, some knowledgeable observers would hold that, because of
the shift in the composition of the labor force
already noted, the practical minimum target
today might be about 4Y:2 -5 percent as far as
measures to stimulate aggregate demand
through monetary and fiscal policy are concerned.

Lags in monetary policy impact
A third major factor which tends to inhibit
the use of monetary policy in combatting inflation, and which results in calls for its use to
provide short-term stimulus to the economy, is
a complicated technical one. Namely, the lags
in the effects of a change in monetary policy
seem to be shorter for production, employment
and profits than for prices. Admittedly, our
knowledge about the length of those lags is imperfect. But it is reasonably clear that the "good
news" from easy money appears first, with production, employment, and profits expanding
within, perhaps, 6 to 12 months. However, the
"bad news" comes later, in the form of increased inflation with a lag of perhaps 1 to 3
years. Conversely, if a tight money policy is
adopted, the bad news of a dampening economic activity comes first, whereas the good
news of a diminished rate of inflation is delayed.
In these circumstances, it is not surprising that
elected officials who must face the voters at regular intervals tend to prefer an easy money
policy.

In these circumstances, a very useful way to
fight unemployment is to attack the structural
source of the problem by helping to increase the
marketable skills of those groups who lack experience. Such measures as low-interest education loans to youth and minority groups, retraining programs directed toward skills where
job vacancies are high, and steps to facilitate
worker mobility are all important in this context. Rather than imposing inflation on everyone by attempting to reach our employment
goals through expansionary monetary and fiscal
policies, our aim should be a much more vigorous use of selective means to deal with these
specific problems. We need a high-powered rifle
shot approach, rather than the shotgun approach of monetary and fiscal policy.

Monetary policy too expansive
Thus, it may be asked, has monetary policy
been a principal cause of our inflation problem,
6

Interest rates, as the price of money, are determined by the supply and demand for funds,
which in turn are critically influenced by inflation expectations. On the supply side, in a. period of inflation lenders will expect an interest
premium to compensate for the erosion by inflation of the value of their assets. On the demal1dside, the need for funds in a period of inflation is boosted by rising prices of new plant
equipment, inventories and consumer goods.
Additionally, expectation that repayment will
be in depreciated dollars will also add to demand for credit. The resultant heavy credit demands push rates even higher.

with the accompanying high level of interest
rates,and could this have been avoided if monetary policy had been tighter in recent years? In
testimony earlier this year before the Congress,
Chairman Burns acknowledged that, with the
benefit of hindsight, monetary policy may have
been overly expansive in 1972. Some of our
critics, such as Professor Milton Friedman,
would go much further-alleging that the
money supply has grown too fast since about
1970, and that this played a major role in producing the current inflation.
Such criticism, whether or not fully justified,
is easy enough to make, based both on monetary theory and statistical studies, but it seems
to me to ignore real problems in the real world.
No central bank can be or should be wholly independent of government. The elected representatives of the people of the United States,
both the Congress and the Administration, must
have the ultimate responsibility for economic
policy. The Federal Reserve System must take
account of the high priority which the Congress
and the Administration have assigned to full
employment and economic growth, which has
often conflicted with stable prices. Central
banks cannot completely ignore such imperatives-even against their better judgment. It is
vital that this matter be thoroughly appreciated,
not only by the Congress and the Administration, but also by the business and financial community and the general public. It is only in this
way that we can get support for the belt-tightening measures needed to overcome the corrosive problem of rampant inflation and sky-high
interest rates.

It is crucial to realize that the sharp escalalation of interest rates in the first half of 1974
has occurred despite a continued growth in
the money supply at a rate which some of our
critics fear is still too large to be non-inflationary. According to latest estimates, the narrowlydefined money supply (M 1) rose at an annual
rate of 7.0 percent in the first six months of
1974. Thus, the extremely high level of interest
rates has stemmed principally from forces set
in motion by inflation itself-i.e., by an inflation premium in interest rates and the way in
which inflation magnifies credit needs.
In a very real sense, the double-digit inflation and accompanying high interest rates from
which we are now suffering reflect inflationary
policies of the past, the symptoms of which
were temporarily suppressed during the period
August 1971 to early 1973 by wage and price
controls under various programs. Unfortunately, the inflationary process is not quickly reversible, and it will probably require several
years to reduce the rate of inflation, and hence
interest rates, to more reasonable levels. If sole
reliance continues to be placed on monetary
policy to do the job, unaided by fiscal restraint,
it may take even longer. It is vital to recognize
that rampant inflation cannot be brought under
control without sustained monetary and fiscal
restraint, in the U.S. or any other country. I
believe that this conviction is shared by most
economists of all schools of thought. Thus, the
great challenge that we face in the process of
licking inflation is to design the best measures
to restrain demand.and to increase supplies.

Inflation and financial markets
Having dealt at length with "what went
wrong," I would next like to deal with the pressing question of "where do we go from here."
Specifically, I will attempt to assess the consequences of severe inflation for the economy and
financial markets and the policy options available to deal with these problems. But first, I
must emphasize the crucial role which inijation
plays in causing high interest rates.
7

"cooling off" the economy. This is a necessary
first stepin purging the economy of inflationary
excesses and starting on the long road back toward stable and non-inflationary growth.

High and rising interest rates have taken
their toll on financial markets. To the man in
the street, some of the most obvious results
have been the decline in the stock market and
the· sharply reduced supply of funds for home
loans· at savings institutions. These institutions
have. endured heavy withdrawals of funds, as
depositors placed their funds in higher yielding
market instruments, and tht consequence has
been a major curtailment oHunds to the housing industry. To the man on Wall Street, the
dangers have been just as ominous. For example, public utilities have experienced serious
difficulties in raising money in the capital market, and the commercial banks have had increasing problems in raising funds to meet
heavy loan demands.

Policy recommendations
What can policymakers do to extricate the
economy from the present situation of surging
inflation and high interest rates? I believe that
several major lessons are implicit in what I have
already said about the dangers of inflation and
of unbalanced policy responses. However, these
lessons can be summarized in the following four
specific policy recommendations.
1. Longer-term policy horizons. Both with
regard to' monetary and fiscal policy, I suggest
that we explicitly recognize the lagged effects
of policy measures, and work within somewhat
longer time horizons than has been the custom
in the past. In our present uphill battle against
inflation, we should expand our policy-planning
horizons to at least three years to measure the
effect of policy actions being taken currently. A
planning horizon which does not capture the
full consequences of current policy actions, especially with regard to prices, necessarily has an
inflationary basis.

The market disruptions caused by high interest rates, in turn, have seriously affected the real
economy. Those who have invested in stocks
and bonds, directly or through mutual funds
and pension trusts, have suffered substantial
capital losses, and have become poor sales prospects for new homes, new cars and other bigticket items. And higher borrowing costs generally have contributed to higher prices of most
goods and services.
One may certainly ask whether we must put
up with such severe dislocations in the financial
markets and the overall economy. Unfortunately, the answer to this question appears to be
yes. A policy specifically aimed at reducing interest rates now would require massive injections of reserves into the banking system by the
Federal Reserve and an acceleration in the
growth of money and credit. The result might
be a temporary levelling off or decline in interest rates, and a short-run rise in output. But
in the longer run, this policy would cause an
even sharper rise in prices, \fhich in turn would
cause interest rates to rise e~en higher.

2. Budget reform. I applaud Congress' efforts this year in moving toward budget reform.
By setting up new machinery that will deal with
the budget as a single entity, you are in effect
creating a vested interest devoted to the cause
of economic stabilization. For the first time
Congress will be able to vote on fiscal policy:
But beyond that, it seems essential to push for
actual budgets which are restrictive in periods
of severe inflation. The best fiscal policy for fiscal 1975 would be at least a balanced budget, or
preferably a surplus, instead of the $11.4 billion deficit currently projected. In my judgment,
this is the most important single step that the
Congress could take to relieve inflationary pressures and to reduce the level of interest rates.
Up to the present, far too great a burden has
been placed on monetary policy, with the antiinflation effort centered around credit controls
and the resulting high price of credit.

Since high interest rates have had such painful consequences, it is pertinent to ask whether
they have done any good in moving toward a
solution to the inflation problem. I see mounting indications that the high cost of credit is
having the desired rationing effect, both from
the standpoint of borrowers and lenders, in
8

3. Economic priorities. I would recommend
an amendment to the Employment Act of 1946,
stating explicitly that price stability is a coequal goal of economic policy, along with
"maximum employment, production, and purchasing power." Further, I would suggest making explicit in policy decisions the implicit tradeoff between full employment and stable prices
whenever a conflict arises between these two
goals. In the past, our laudable emphasis on the
full-employment goal has caused us to downplay other necessary objectives, with the results
we see today.

subject to change. In recent years, it appears that the trade-off has worsenedLe., it now takes more inflation to produce a given decline in unemployment.
Even with the recent 11.5 percent inflation rate, the unemployment rate last
month was 5.2 percent. Moreover, the
trade-off appears to be a short-run phenomenon. In the long run, say, three years
or more, a higher inflation rate will not·
"buy" a lower unemployment rate. Only
in the short run of one to two years will
we possibly observe a higher rate of inflation leading to a temporary decline in unemployment. This observation follows
from the widely accepted doctrine that in
the long run the growth in the money supply affects only the general price level,
while in the short run the principal effects
are on production and employment.

4. Monetary policy. If we are to overcome inflation, the Federal Reserve System must have
Congressional and Administration support in
pursuing a non-inflationary growth target for
money and credit-even if high interest rates
and some increase in unemployment are necessary in the short run, as inflationary forces are
wrung out of the economy. It is particularly vital that we not be pulled off course toward excessive credit ease by the two major forces that
have done so in the past-i.e., the necessity to
finance large-scale budget deficits, and the tendency to call for easy money to solve structural
unemployment problems that could be handled
better through selective measures of the type
I've described.

2. Benefits and risks involved in the FederalReserve accommodating non-recurring price increases originating in supply
shortfalls and other special events.
It is my view that the Federal Reserve
should seldom, if ever, accommodate
price increases originating from supply
shortfalls and other transitory events. This
will no nothing to ease the supply problem, and by facilitating higher prices, it
will contribute to a higher permanent rate
of inflation. As Chairman Burns said last
winter, we recently have had a shortage
of oil, not a shortage of money, and we
cannot increase the supply of the former
by increasing the supply of the latter.

Concluding comments
My testimony, Mr. Chairman, has attempted
to deal with the broad problems raised in your
letter of June 19. Now I would like to conclude
with a brief recapitulation directed specifically
toward the six issues noted in that letter that
involve some dispute in monetary economics.
While recognizing that there are differences of
opinion on these matters, both within and without the Federal Reserve System, my own views
are summarized below.

3. The benefits and risks involved in monetizing deficit spending.
As I indicated earlier, it is undesirable for
the Federal Reserve to monetize the deficits of the Federal Government in periods
of full or nearly-full utilization of resources. At such times, the monetization
of Federal deficits tends to pull monetary
policy off course toward excessive monetary expansion, and thus contributes to
inflation. In periods of recession, on the
other hand, it is appropriate and benefi-

1. The reliability of the trade-off between
inflation and unemployment as a guide
for monetary policy.
The trade-off between inflation and unemployment seems to be unstable and
9

cial to monetize Federal deficits as part
of a program aimed at recovery. Unfortu
nately, Federal budget deficits (as mea
sured by the unified budget) have occurred
in 14 of the last 15 years, irrespective of
the state of the business cycle. There have
been a number of important technical re
forms in recent years, such as the auction
ing of Treasury securities, which have re
duced the Federal Reserve’s role in
support of the debt management area.
However, the fundamental solution to the
problem lies in keeping spending in line
with receipts, thereby eliminating the def
icits when they are not needed to bolster
a sagging economy.

High interest rates reflect price inflation,
and in turn high rate of money grow th
Percent

4. The benefits and risks involved in the
Federal Reserve fighting money market
fires.
A primary function of any central bank is
to act as the lender of last resort to pro
tect the institutional integrity of the finan
cial system. In this sense the Federal Re
serve must “fight money market fires.”
Many scholars believe that a serious ag
gravating factor in the Great Depression
was the Federal Reserve’s failure to per
form this function in an aggressive way.
In my opinion, the Fed has done a credit
able job in protecting the institutional in
tegrity of financial markets in recent dec
ades during periods of liquidity crises,
without letting the money supply get out
of control on the upside.

First H a lf

mand for these funds. However, short-run
changes in money growth have little if
any direct effects on the overall rate of in
flation. In the long run, sustained changes
in the rate of growth in the money supply
are a major determinant of the rate of in
flation, and expectations of future infla
tion rates. Since current rates of inflation
and inflation expectations are major de
terminants of the current level of interest
rates, sustained changes in the rate of
money growth will have a major effect on
the level of interest rates. The lesson here
is that efforts to reduce interest rates by
accelerating money growth in the short
run will be self-defeating in the long run.
Thus, excessive easy money over a period
of several years leads to inflation, which
is a major factor producing high interest
rates.

5. Relationships between money supply, in
flation and interest rates.
The rate of growth in the money supply
is a major influence determining the level
of interest rates in both the short run of a
few months, and in the long run of a few
years. However, the nature of this influ
ence is quite different in these two time
periods, because of the role of inflation in
these relationships. In the short run, ac
celerated money growth can force interest
rates down, and restricted money growth
can force interest rates up, by altering the
short-run supply of funds relative to de10

6. How to use monetary policy to check
inflation and to bring interest rates back
down to reasonable levels.
Monetary policy can check inflation and
bring interest rates back down to reasonable levels through a gradual but
steady policy of reducing the rate of mon-

etary expansion to a non-inflationary
growth track. But to make this a viable
approach, we will need a powerful assist
from a policy of fiscal restraint, along
with support for making stable prices a
goal of equal importance with economic
growth and full employment.

1. "(1) the reliability of the trade-off between inflation and unemployment as a guide for monetary
policy; (2) the benefits and risks involved in the Federal Reserve accommodating non-recurring price increases originating in supply shortfalls and other
special events; (3) the positive elements and the risks
involved in monetizing deficit spending; (4) the benefits and risks involved in the Federal Reserve's fighting
money market fires; (5) the relationships between
money supply, inflation, and interest rates; (6) how to
use monetary policy to check inflation and bring interest rates back down to reasonable levels."
Wright Patman letter of June 19, 1974 to John J.
Balles

2. "How Well Are Fluctuating Exchange Rates Working," Report of the Subcommittee on International
Economics of the Joint Committee, 93rd Congress, 1st
Session (Washington, D.C.: U.S. Government Printing
Office), August 14, 1972.
3. George L. Perry, "Changing Labor Markets and Inflation," Brookings Papers on Economic Activities,
No.3, 1970.
4. "The Inflation Process in the United States." Study
prepared for the use of the Joint Economic Committee
by Otto Eckstein and Roger Brimmer, (Washington,
D.C.: Government Printing Office), February 22,
1972.

The Relation Between Income
Growth and Unemployment
By Larry Butler

On an optimistic-realistic view, the vest hope
[for the 1970's] is that a 4 percent rate of unemployment and a 2 percent rate of price increase will prove compatible and that such a
combination will be regarded as a satisfactory
compromise by the American public. This was
the hope before the Vietnam spurt in mid-1965,
and nothing that has happened since demonstrates that it is unattainable. 1 *

57 with average unemployment of 4.3 percent
and 1965 with an average of 4.5 percent-and
both were associated with inflation near 2 percent. It is now clear, however, that either something was wrong with Okun's analysis or that
the economy has changed dramatically in recent years: from 1970 through 1973, unemployment averaged 5.3 percent, and inflation
averaged 4.7 percent.

These words, dating from late 1969, are
those of Arthur Okun, one of the principal
architects of the Federal government's economic
policy in the 1960's. His "best hope" may be
taken as the consensus view in 1969 among
economists of what the 1970's might bring.
And in fact, neither number was wildly out of
line with postwar experience up to that point;
from 1947 through 1969, the unemployment
rate averaged 4.6 percent and inflation proceeded at an average rate of 2.6 percent.

Underlying this discussion is the relation
known as Okun's Law, which in its most general form states that there is a highly stable,
predictable relation between the unemployment rate and the rate of growth of real income. Okun's development of this concept led
to his construction of two of the best-known
tools of fiscal and monetary analysis-potential GNP and the high-employment Federal
budget. The measures, in the form which came
into common use in the mid- and late-1960's,
measure GNP and the Federal deficit, not as
they are, but as they would be if the unemployment rate were at 4 percent.

Nor was there good reason on the surface to
believe that the targets of 4-percent unemployment and 2-percent inflation were incompatible. The two serious inflations of the
postwar period-those associated with the Korean and the Vietnam wars-were accompanied by unemployment well below 4 percent,
at a 3.1-percent average in 1951-53 and at a
3.6-percent average in 1967-69. In addition,
there were two peacetime periods when policy
brought unemployment near 4 percent-1955-

Okun's estimate was that on the basis of the
historical growth in the labor force, capital
stock and productivity, an annual rate of
growth of real income of approximately 4 percent would produce a constant unemployment
rate. 2 He also estimated that each 1.0 percent
of growth above the 4-percent figure would, on
a quarterly basis, reduce the unemployment
rate by .08 percent. Thus, 5 percent real
growth, sustained for a full year, would lower

*Footnotes at end of article.

Natural rate of unemployment

unemployment by 0.3 percent. With these two
numbers, it is easy to compute the added real
income at each point in time which is needed to
produce 4 percent of unemployment. This
added income, which has also been used widely
in fiscal and monetary analysis, is called the
GNP gap. The high quality of the relation be
tween the gap and unemployment is apparent
from the chart, which presents the observed
relation between potential and actual output
and unemployment (Chart 1).

The bottom panel in the chart makes it clear
that the computation of potential GNP based on
4-percent unemployment is arbitrary. The qual
ity of the fit to observed unemployment would
be unchanged if the line for zero gap were
shifted up or down to a different level of full
employment. This is so because the GNP gap
approach essentially reflects only supply condi
tions: an added unit of labor in this world al
ways generates and requires added growth in
real income. There is no connection with the
related demand notion that high demand for
labor should also push wages up relative to
other prices and thus automatically lower that
demand. That this world cannot always be so
may be seen by taking the case—which oc
curred in both the Korean and Vietnam wars—
where neither added labor nor added capital
were to be had. Any attempt to increase output
must fail; if aggregate monetary or fiscal policy
were used to this end, the effect would simply
to be increase prices.

Chart 1
B illio n s o f 1958 D o llars

The necessary addition to the discussion is
provided by Milton Friedman’s concept of the
natural rate of unemployment. Friedman ob
serves that the unemployment rate is basically
a measure of the degree of tightness in labor
markets, and hence the amount of pressure on
wage rates. At each point in time there will be
one unemployment rate—the natural rate—
which involves no change in the amount of
wage pressure on the rate of price inflation. The
rate of increase in wages at the natural rate will
just equal the rate of growth of productivity

1955

1960

1965

1970

1974

an increase in wage pressure on prices will
eventually be fully reflected in the price level
but will have no effect on the level of real income. This assertion is natural in economics
because of the usual assumption that people are
not subject to "money illusion": aUeast in the
long tun, workers and businesses respond to
shifts in real (and not in money) wages and
assess their welfare accordingly. Thus Friedman's approach would suggest that. potential
income should only be computed with reference to the natural rate. Use of any other rate
would imply that the calculation is not neutral
to inflation, that it embodies some amount of
misallocation due to changes in inflation.

plus the rate of inflation expected by participants in the labor market. Gearing policy to
any unemployment rate lower than the natural
rate will cause problems, for the resultant wage
pressure on prices will eventually mean that the
inflation rate will go up, and will require a further wage rate increase to offset the new inflation rate. Thus the inflation rate could increase
without limit, unless the authorities decide at
some point to pursue policies which raise unemployment to at least the natural rate.
This point is illustrated by Chart 2, which depicts the familiar Phillips curve trade-off between the growth in wages and the unemployment rate. The natural-rate analysis permits us
to say that changes in the expected rate of inflation shift the short-run trade-off up or down.
In the chart, an increase in the rate of expected
inflation from pel to pe 2 increases the rate of
increase of wages associated with any unemployment rate by the same amount-the natural
unemployment rate, associated with no change
in the amount of wage pressure on the inflation
rate.
The main requirement for the existence of
a natural rate is that changes in prices operate
independently of the real economy; that is, that

It is the purpose of this article to measure
the natural rate of unemployment implicit in
Okun's Law and examine the relation for
changes over time. It will be shown that, except
for the effect of temporary conditions:

1. The natural rate of unemployment has remained unchanged at 4.8 percent during
the post-war period;
2. The growth rate of potential income has
increased from 3.5 percent before 1956
to 4 percent since 1965; and

Chart 2
Rate of. Change of Wages
Natural Rate of Unemployment
I

Trade-off with Expected Rate
of Inflation: pe2
pe2 plus Rate of Change
of Labor Productivity

Trade-off with Expected Rate
of Inflation = pel

pel plus Rate of Change
of Labor Productivity

'---

Unemployment

..L..

Rate

potential rate of growth g: 3

3. The relation between income growth and
unemployment has changed in a way
which makes it much less likely that high
income growth will produce very low unemployment rates (below 4 percent) than
was the case in the early post-war period.

(1)

AUt

= -a(YR t -

If we sum all quarterly changes in unemployment from 1 to time t, and add the level
of the unemployment rate U o at time zero, we
obtain the level of the unemployment rate U t at
time t as a function of the sum YS t over all past
rates of income growth and· a time trend. This
last term arises because a sum over a constant
growth rate g will increase by just one unit of
growth per quarter:

Okun's Law and the natural rate
There is no reason in principle for either
Okun's Law or the natural rate of unemployment to be particularly stable over time. Both
depend on a number of factors which can shift
over time. For example, with respect to Okun's
Law relating the growth in potential GNP to
the growth of the input of capital and labor,
the growth rate of the civilian labor force is far
from constant, and is influenced by Such items
as the number of young persons entering the
labor force and the number of women entering
or. reentering the labor force, both matters
largely beyond the scope of economics. But it
may well be that all such influences are transitory, and that a simple correction for them will
produce relations which are indeed very stable.
Such is the case for Okun's Law, at least for the
period from the end of World War II through
the mid-60's, the period studied by Okun and
his followers. There is also some evidence, provided by Friedman in the form of an examination of the relation between inflation and unemployment, that the natural rate of unemployment was also largely unchanged in the same
period.

Two other items must be taken into account
before fitting the equation. First, there is no
logic that requires all of the effects of a certain level of income growth to occur in the
present quarter. Our investigation of this point
showed that the best statistical results would
be obtained if we used instead a simple average of the current and just-past values for the
change in real income. We replace the YS t
term in equation \2) with:

Secondly, the relation will be subject to a
variety of temporary elements, and there must
be a correction for such disturbances in the
relation if our estimates are to be accurate.
A simple correction is to allow the unemployment rate to depend on the observed error et-l
in the relation last quarter times a correction
factor PP as well as on the other, more basic,
variables. What this dependence means is that if
the basic projection was high last quarter, it
will be high again this quarter because the transitory forces which caused the high projection
will not yet be completely spent. These additions yield the final form of the relation:

Whether this stability remains in the 1970's
is a question of some importance for policy
making, because Okun's Law and the natural
rate both bear directly on the major social concerns of policy-the high social cost of unemployment and the misallocation of resources
implicit in inflation. We will examine this stability with the aid of a minor extension of the
basic Okun model to allow for a measure of the
natural rate of unemployment. The Okun model
makes the change in the unemployment rate
AUt at time t equal some number a (the inCome multiplier) times the difference between
the rate of growth of real income YR t and its

= Uo -

a(YA t

gt)

+ pet-l

U t is the overall unemployment rate
is the equilibrium unemployment rate in
1948

a is the income multiplier
YA t is a two-quarter moving average of the
sum over all annual rates of growth
since 1948
g is the growth rate of potential income
peH is a correction factor times the error in
the relation in the previous quarter.

relative importance of labor and other factors
in generating inflation. It may be that the
source of the stability in the natural rate we will
observe is a systematic tightening in the supply
of capital or of production inputs to the United
States by the rest of the world. Should such be
the case, there would be no change in the implications of our analysis for aggregate policy
aimed jointly at all sectors, but there would be
a possibility of devising specific. policies aimed
at the relief of particular bottleneck sectors and
thus perhaps at a permanent lowering of the
natural rate of unemployment. Thus, the results
we obtain should be read entirely as having
implications for aggregate policy.

With these alterations, deviations in the relation either show up as random events of no
importance or are subsumed in the natural
growth rate of income. In other words, there
can be no trend in the natural rate of unemployment. Such is not the case for the equation as originally written in equation (1), for it
would not be possible to distinguish between
differences caused by changes in the rate of income growth and by changes in the natural rate
of unemployment. Both would appear as
changes in the value of the constant. Either
type would, of course, be a true structural
change in the economy, but they each would
have very different meanings.

Interpretation of results
We fit the adjusted relation to the unemployment rate for the period 1948.3 through 1974.1
-the longest period available with quarterly
data for all series-and obtained the following
results. Standard errors for the estimated coefficients are shown in parentheses below the
equation; income growth is at annual rates.

The natural rate is a reference point for the
amount of wage pressure exerted on the economy by a given unemployment rate. If the rate
does not change over time, the essential meaning of a given unemployment rate does not
change. The potential growth rate for income
and the income multiplier are in contrast summary measures of the relations among productivity, labor force growth,. and employment. If
they do not change, the nature of technological
and labor-force growth underlying Okun's Law
does not change. All of these measures are
subject to some extent to the offsetting forces
of substitution, but especially so the natural
rate of unemployment. There is good reason
to believe that a relative increase in, say, the
numbers of some low-skill, high-unemployment
group of the labor force would be partly offset
by a lowering of that group's wage rate relative
to others. There is no similar automatic presumption that an increase in technology would
be offset by a decrease in labor force growth,
or that it would leave unchanged the potential
growth of income.

= 5.82-.092(YA t -3,76t)
(.35) (.005)

(.21)

+ .856e

t-l

(.051)

The standard error in fitting this quarterly average unemployment rate is .217 percent, which
compares well with the monthly samplingerror of .20 percent for the rate published by the
Bureau of Labor Statistics.
This relation may be interpreted as follows:
1. If the two-quarter average growth of
real income is above a 3.76 percent annual rate, and no temporary factors are
at work, the unemployment rate will
fall. Below that growth rate, unemployment will rise.
2. If the two-quarter average growth rate
is one percent above this critical value
and no temporary factors are present,
the unemployment rate will decline by
.092 percent.

It is worth noting in this regard that there
is no presumption in the present tests as to the

3. If some temporary factor is present in
quarter t, then 85.6 percent of the fac16

tor will be present in quarter (t+ 1) .

The allowance for shift was made by dividing the period of fit into three equal parts, ending respectively in 1956.4, 1965.2, and 1974.1.
The estimated coefficients were set to be constant in the first and last periods, with a smooth
transition from the initial to the final values occllrring during the second period in order to
provide continuous values for all of the estimates throughout the period. The differences
which arose were then checked for statistical
validity, and only the constant term and the
income mllltiplier proved to have shifted; the
multiplier on the time trend did not change.
This result is important, for the role of the parameter on the time trend is to determine the relation between the natural rate of growth of income and the natural rate of unemployment:
if it does not change, the natural rate of unemployment does not change, not matter what
happens to the natural growth of income, because this parameter is the product of the income multiplier and the growth rate of potential income. The same calculation used above
yields a natural rate of unemployment of 4.82
percent, essentially the same number obtained
before. Thus, the natural rate is now, and has
been for the entire postwar period, very close
to this number. 6

4. The value of the constant, 5.82 percent, .is the sum of the natural rate of
employment, defined entirely in terms
of productivity and labor force factors, 4 and the amou.nt of displacement
of the unemployment rate from that
level in 1948.In calculating the natural
rate,. we would find that average unymployment in the period of fit was
4.80 percent, and that the average
growth rate of real income was 3.77
percent. Because the latter is above
the natural growth of income, the natural rate of unemployment must be
above the observed average rate.
Though the difference in growth rates
is small, over the 102 quarters of the
sample period, it is not trivial, and the
necessary correction comes to .04 percent, making the natural rate of unemployment 4.84 percent.
These results largely validate Okun's results:
the 3.8 percent potential growth rate for income and .09 income multiplier are not appreciably different from Okun's 4.0 and .08
figures. It does appear that the natural rate of
unemployment is now, and has been for the
entire postwar period, far above 4 percent.

However, two important shifts have occurred: an increase in the natural rate of growth
of income and a decrease in the multiplier on
income. The two equa tions appear below; the
numbers have the same interpretation as before.

We can check on this result by asking whether
the underlyingrelation between income and employment has changed over the years. The answer to this question is a qualified yes: we can
be 95 percent certain that the relation has
changed, but we cannot be 99 percent certain. s
Despite this mild uncertainty, we get large policy
implications from the observed changes, because they substantially affect our ability to
achieve very low rates of unemployment. This
uncertainty does mean that the forecasting error
of the relation gets improved by only a very
small amount by allowing for a shift. The expected error in our relation is .217 percent in
the equation above; after the shift, the expected
error drops to .208 percent. Such an improvement in fit would not be worth the added complexity of the relation were it not for its policy
implications.

1. Fully effective 1948.3-1956.4; declining in importance 1957.1-1965.2.
Ut

6.66-.099 (YA t -3.5l) +.831et_l
(.45) (.005)

(.21)

(.055)

2. Increasing in importance 1957.11965.2; fully effective 1965.3-1974.1.
Ut

4.03 - .087 (YA t - 4.0lt) + .831et_l
(.95) (.005)

(.24)

(.055)

Thus, achieving a decline in the unemploy
ment rate now requires much higher income
growth (4.01 percent against 3.51 percent)
than it did earlier, while the response of un
employment to given income growth is lower
now than before (.087 against .099). This
asymetric change means that in boom periods,
the higher natural rate of income growth
and the lower income multiplier both work
to keep unemployment from going as low
as it would have under the earlier relation,
while in recessions the two largely offset each
other, with the high natural growth rate still
working to keep unemployment up but with the
low multiplier now working to keep it down.
This point is made in concise form in Chart 3,
which contains projections made with two re
lations for the period from 1970.1 to 1974.1—
a period which contains both a recession (from
1970.1 to 1971.1) and a rather long period of
very high income growth (from 1971.4 to
1973.2). These projections are made by ignor
ing the allowance for transitory components
(the multiplier on et_i) and thus track only the
basic Okun’s Law relation. In this chart, the
two relations have almost identical perform
ance in the recession period (the first five quar
ters), but the relation based on the earlier data
begins to deteriorate sharply in the quality of
its projection once income growth moves to
high levels in 1971.4. The deterioration con

tinues throughout the high growth period, and
only begins to unwind in the most recent three
low-growth quarters. The relation in fact pro
jects that the rates reached near the 1973 mini
mum would be well below the lowest peacetime
unemployment rates of the postwar period,
reached in the 1955-56 expansion.
The deterioration would not be extremely
serious, and there would be no significant dif
ferences between the beginning and end of the
period, if the deterioration were regarded as
arising from a transitory component (Chart 4).
But this correction will not work. The two rela
tions once again show almost the same perform
ance during the 1970 recession, with the qual
ity of fit being much better than in Chart 3.
After the recession, however, the relation based
on the recent period continues to track the ac
tual unemployment rate rather closely, while
the relation based on older data steadily under
projects the actual numbers.

Conclusions of study
1. For the postwar period as a whole, the
best values for the basic formulation are 3.8
percent for the natural rate of growth of in
come and .09 for the quarterly multiplier be
tween real income and the unemployment
rate. These values agree rather well with the

Chart 4

Chart 3
Percent

Percent

principal Okun results of a 4.0 percent natural
growth rate and a,08 income multiplier. Thus
the· events of the last seven years have not invalidated the main thrust of Okun's Law.
2. The principal applications of the Lawthe constructions of potential GNP, the GNP
gap, and the full-employment budget-have all
been based on a 4.0 percent unemployment
rate, and ignore the fact of a 4.8 percent natural
rate of unemployment. .This natural rate has
nofchanged at all during the postwar period,
and thus stands as at least as durable an artifact as Okun'sLaw itself. It follows that policy
based on a 4.0 percent full-employment rate
will be an engine of inflation. Policy, both now
and in the past, either should have aimed at
an unemployment target of 4.8 percent~not
4.0 percent-or it should have built much more
comprehensive inflation protection for individuals and businesses into the economy's in~
stitutions than it has.
q. Though the added data for the 1970's
generally support Okun's number for the postwar period as a whole-with his based on data
through the mid-1960's-they also suggest
that there has been a change from the relation which held in the 1950's. The shifts involved are modest: the natural growth of real
income has increased from 3.5 to 4.0 percent,
and the multiplier from income growth to the
unemployment rate has declined from .10 to
.09, with no change in the 4.8 percent natural
rate of unemployment. However, these small
shifts have an important policy implication.
When income growth is low, the two changes

act to offset each other, and the recession behavior of Okun's Law has thus remained largely
unchanged over the years. But when income
growth is high, the two shifts reinforce each
other and prevent the unemployment rate from
going as low as it formerly did. The basic relation projected a minimum unemployment rate
of 3.6 percent for the 1971-73 period, while the
recent relation projected a minimum of 4.3
percent. It is thus no longer possible to get to
4.0-percent unemployment during even the
strongest of peacetime booms.
4. Because the natural rate of unemployment has not changed, it is not possible to describe the shifts which have occurred as being
in any meaningful sense "structural." A structurally unemployed person gets that way because he or she possesses a mix of skills which,
because of technological factors and the skill
mix of the labor force, does not lend itself to
finding a job at the going wage. These elements
are precisely those which determine the naturalrateof unemployment, so that it is hard to
conceive of a true structural shift which does
not alter that rate. Undoubtedly, there has developed over time a different composition of
the labor force and a different mix of available
jobs,but the. evidence suggests that these
changes have been offset precisely by substitution between labor-force categories and by
shifts into newly available jobs. This argument
does not necessarily mean that there is no problem of structural unemployment: it means instead that the problem has not gotten any
worse (or better) over the years.

Footnotes

Technical notes

1. Okun, The Political Economy of Prosperity
(Washington: Brookings, 1970) p. 102.
2. This statement is a simplification of the
subtle Okun approach to the measurement
of potential output. After careful analysis,
Okun concluded that potential output-adjusted to 4-percent unemployment~grew at
an average of 4l/z percent in the late 1940's
through 1953, at 3l/z percent through 1961,
and at 4 percent since that time. Our results
will largely-though not completely because
of different sample periods-validate those
numbers. Ibid., ch. 2.

A. Statistical method. The statistical tests
employed above use Scheffe's S-method for . the
analysis of variance. This method requires that
one establish a "pool" of acceptable independent variables for a relation, none of which depends for the desirability of its inclusion in the
relation on the presence or absence of any
other variable in the relation. The method then
operates by casting variable out of the pool: if
there are k variables, the method operates by
casting out the least important variable, the
two jointly least important variables, and so on.
The results are normally presented in reverse
order of casting out, and thus have the same
appearance as a stepwise regression. The difference is that the size· of the pool determines the
number of lost degrees of freedom, and the
method is thus relatively invulnerable to attempts at "data-mining."

3. This equation is the inverted form of Okun's
potential-output equation, written in a way
which begs the question of what an appropriate growth rate for output is. The first
close analog of this equation appeared in
the Council of Economic Advisers' statement to the Joint Economic Committee of
March 1961.
4. The Friedman definition takes into account
the pattern of individual adjustments to inflation, and thus cannot be used without a
formal inflation-generating mechanism. Because the subject here is Okun's Law, we
use a narrower definition, without reference
to either the prevailing rate of inflation or
the pattern of adjustment to that rate. In
practice, Friedman's natural rate should be
essentially identical with ours. For a formal
model of the nominal price apparatus, see
Milton Friedman, "A Theoretical Framework for Monetary Analysis," Journal of
Political Economy (1970), pp. 193-238. To
our knowledge, the earliest exposition of
the natural-rate concept is in Friedman's
"The Role of Monetary Policy," American
Economic Review (1968), pp. 1-17.
5. The statistical results are in Appendix A.
6. A mathematical treatment of this observation is given in Appendix B.

The attraction of analysis of variance as an
econometric technique has long been obvious,
but its use has been severely limited because an
appropriate· technique for setting up pools for
distributed lag models is not at all obvious. A
second problem, the stochastic time dependence
of most economic time series-which renders
invalid the only non-robust aspect of analysis
of variance, its assumption of time indepen~
dence-has been solved by the advent of the
Cochrane-Orcutt and Hildreth-Liu serial correlation corrections. The correction used in this
paper is Cochrane-Orcutt because it is a true
non-linear least~squares technique and thus
fits explicitly into the analysis-of-variance
framework. The "pool" problem for distributed
lags is that we normally have no very clear
notion of how long a distributed lag should
be, and we often have only the vaguest idea of
the proper shape for such a lag: the only moreor-less universal requirement is that the structure be continuous. The standard solution to
distributed-lag estimation is the polynomial20

*F's are placed on line for which the variables
included are the maintained hypothesis.

distributed lag, a device which does not lend
itself to "pooling" very well: there are 136
different polynomial lags of length between one
quarter and sixteen, a "pool" which would
more than exhaust the number of postwar quarterly observations on the economy. Our solution to this problem was to select one polynomial of each desired lag length, each set to
form a continuous curve through to the maximum lag and have one estimating parameter
leftover. The simplest such family of curves is
the set of parabolas forced to zero at either end
of the lag structure. A typical member of the
"pool" for variable X t would be:

~ (2: ~~O

(i+ 1)

(E~~o

1: Significant with at least 99.9-percent confidence.
2: Significant with 97.5-percent confidence,
but not with 99 percent.
3: Significant with 90-percent confidence, but
not with 95 percent.
x: Not significant with 90-percent confidence.
An easy summary device. for this analysis is
the triangle of F's, which appears below. The
Fhn-k'S appear on the diagonal.

(k-1) X'.)/

(i+ 1)

Test hypothesis

(k-i))

Maintained
hypothesis

The pool variable for the income growth rate
YRtabove for k=2 is exactly the paper's YA t
variable. Once YAt entered the relation, no
other member of a pool having k go from 1
to 8 had more than the slightest effect on unemployment.
Having checked for lag structure, we then
checked for structural change. These tests were
separated only because we wanted to use the
largest possible sample in the structural change
test; with the short structure found, it was
necessary to lose only one observation to the
distributed lag. The main relevant information
from the analysis appears in the table below.

(1)

(2)
(p correction) 305.99 1
(3)
(income split) 159.29 1
(4)
(constant split) 114.171
(5)
(trend split)
85.11 1

(2)

(3)

I
I
I
I
I (4)

I
I

3.83 5

I
I
I

5.22 2

6.40 3

3.56 3

3.38 4 1·33 x

1: Significant with at least 99.9 percent confidence.
2: Significant with 99 percent confidence, but
not with 99.9 percent.
3: Significant with 97.5 percent confidence,
but not with 99 percent.
4: Significant with 95 percent confidence, but
not with 97.5 percent.
5: Significant with 90 percent confidence, but
not with 95 percent.
x: Not significant with 90 percerlt confidence.

Sum of squared
Variables in regression
residuals
F 1 *m-k
1. Constant, income,
time trend
19.2200
2. (1) plus autoregressive
correction
4.6983
305.99 1
3. (2) plus structural
4.5214
3.83 3
split on income
. 4. (3) plus structural
split on constant
4.2418
6.40 2
5. (4) plus structural
split on time trend
4.2275
.33 x

The only variable not worth having in the
relation is the structural split on the. trend line,
which with its very low .33 Fi,n-k ratio does
not represent a reduction in variance over the
relation excluding the variable. We may be
97.5 percent certain that the constant does
have a structural split; as a maintained hypothesis, it represents a reduction in variance against
all test hypothesis with at least that confidence.
We have the same confidence that the structural
split on income is significant. Though its F1lll-I<
as a maintained hypothesis is low (significant
only at 90 percent), its F ~,n-k with the constant
split also included, at a value of 5.22, is significant at 99 percent. We then reduce this confidenceso that we have in the constant split because that split is necessary to our confidence
in the income shift. And, finally, the CochraneOrcutt correction is necessary to the relation
to a very high degree of confidence.
B. Computing the natural rate of unemployment. The relations above may be rewritten as
errors-in-variables relations with the unemployment role as the sum of the natural rate of unemployme,nt and the implicit displacement of
unemployment from this rate at time t:

YA~ ~ (E~~ (L: ~ l(YR,_g)))
I

·rl:~

1 (YR t

g)t

An easy and highly accurate approximation
to this· sum for any long series which contains
much rnovement(as is true of income growth)
is to let YR t equal YR n, the mean for the full
sample. We get:

If we apply this formula to the above, we get

Un = U

+a n+1

(YR n - g)

For thefuIl1948.3-1974.1 series 003 observations) the relevant calculation is:
For the natural rate taken as a constant, as may
be done by the obvious errors-in-variables interpretation of U xt , we may compute the natural rate for any period for which the sum over
the displacements is zero. This sum is zero for
the full sample by construction of the results
of running least-squares fits of the type presented in this paper. If we take the mean of the
above relation, we must have:

U n =4.80 +.092X 52X (3.774-3.765)=4.84

Note that we must carry one extra digit of
accuracy in the income growth rates to perform
the calculation to the same accuracy as the
other numbers.
The structural split does not complicate the
calculation of the natural rate overmuch; it
remains true that the sum over the displacements involved is still zero for the full sample,
and the natural rate for the full sample comes
to 4.82 percent. An indication of how this is
derived may be obtained by splitting the relation into two pieces, one relevant to the early
set of parameters and one relevant to the late
set of parameters. In matrix form, and ignoring
the transitory component correction, the relation is:

We may ignore the moving-average aspect of
YA t because each observed growth rate enters
the sum which forms YAt with unit weight
(aside from a minor endpoint problem) and
write:
22

U 48.3

483

1/34

-',

-'2

56.4
57.1

33/34

56.4
57.1

X 33/34

34 X 33/34

57.1

X 1/34

34 X 1/34

algl

U
U

65.2
65.3

74.1

1/34
0

YA
0

65.2

X 1/34

67 X 33/34

a2g2

33/34

YA,
YA

We may now calculate the natural rate for the
two pieces of this relation on the assumption
that the net displacement of the unemploymellt rate in each half is zero. This assumption will not quite be true: some covariance
wilL arise in the middle of the period. This covariance should be quite limited, however, because of the declining weights on the early
parameters in the middle third and the rising
weights on the late parameters. When we perform the calculations, we get:

65.2
65.3

74.1

X 33/34

67X 33/34
68

103

2. Increasing in importance 1957.1-1965.2;
fully effective 1965.3-1974.1.
Un = 4.89+.087 X25.5 X (3.972-4.013}=4.80
The growth rate for income obtained in the
first calculation is above the mean of 3.30
percent obtained by simply splitting the sample
in two at 1961.2 because of the effect of high
income growth in the boom of 1962-65. The
figure in the second calculation gets reduced
from the second half mean of 4.18 percent
because of the 1957 alld 1960 recessions. The
figures are evidently quite close together, much
closer than the disparity in the mean unemployment rates would suggest.

1. Fully effective 1948.3-1956.4; declining
in importance 1957.1-1965.2.

U o =4.71 +.099 X 26X (3.567 - 3.513) = 4.85

Summary Description of
Information System for
Banking Agency Reports

any particular design for banks' internal accounting or recordkeeping systems. Moreover,
the system does not add to reporting burdens
since it remains within the confines of existing
reporting requirements.
A preliminary version of ISBAR has been
prepared for banking industry comment. This
pamphlet, which is being mailed to all commercial banks, contains a summary of the
approach and its major characteristics. A more
complete description of all aspects of the system and copies of its operating materials are
presented in another set of documents bearing
the general title Information System for Banking Agency Repor.ts. These documents will be
available from the agencies on request in a
few weeks.
Members of the banking community and
others who are interested are invited to review
the approach and its procedures and materials
and to communicate general comments or specific suggestions to any of the agencies. Comments received by February 1975 will be taken
into account in the preparation of an operational version of the material, which is scheduled for release in the second half of 1975. At
that time the three agencies will make the
ISBAR procedures operationally available to
interested banks.
The summary discussion in this pamphlet
focuses on the following questions that reflect
the system's major characteristics:

The Federal Reserve System, the Office of
the Comptroller of the Currency, and the Federal Deposit Insurance Corporation have long
been concerned about the problems and burdens of bank reporting. The three agencies,
both separately and jointly, have instituted a
variety of programs directed toward these problems. As one part of these programs, the agencies have been engaged for several years in a
joint project-the Bank Report Reform Project
-to develop and implement a more systematic
approach to their procedures for requesting
information from banks, for defining what is
wanted in the various reports, and for collecting the information. The operating materials
and procedures developed in this project have
been given the name "Information System for
Banking Agency Reports" (ISBAR).
The project was set in motion by an ad hoc
group of commercial banks-the Steering Com~
mittee on Banking Information-and it has
progressed in close cooperation with this group.
The general approach and main characteristics
of the project were developed within this Steering Committee.
The ISBAR procedures are completely voluntary and optional for reporting banks. These
procedures will be made available by each of
the three agencies for any bank to use if it so
wishes. Each bank will decide for itself
whether to use the ISBAR procedures or to
continue with present procedures. Similarly,
the approach does not presuppose or require

(1) What is ISBAR, how will it be used in report

(2)
(3)
(4)
(5)

(6)
(7)
(8)
(9)

(10)

uses: (a) in their determination of the definition of agency information requests; (b) in
connection with their generation of information
for agency reports on a coded or automated
basis; (c) as an input to their design of recordkeeping and information systems; and (d) in
connection with the physical form of reporting
to the agencies.
(a) The fundamental use of the system by
banks will be definitional. The operating documents provide each bank with the basis for
systematically determining the complete specification of all agency requests for information
that are covered by the ISBAR structure. Similarly, a basis is provided for a systematic comparison of what is wanted on different reports
requesting somewhat similar information.
For such definitional purposes any bankregardless of size, accounting procedures, or
extent of automation or coding of accountsmay find that it can use the system to advantage. This definitional use is independent of
the bank's accounting methods or internal
procedures. There is no requirement, or even
presumption, that a bank has coded its accounts
or automated any of its procedures, nor is there
any implication that it ever intends to do so.
While the Instructions for each report line are
stated in terms of code numbers, these codesinsofar as definitional use is concerned-are
internal to the ISBAR documents. They serve
simply to guide the user from the coded Instructions for the line to the elements of the classification structure and to the Dictionary defining
these elements. Once the definition of a line is
determined in this way, the ISBAR codes have
no further significance for a bank using the
system for definitional purposes only.
(b) While the ISBAR operating documents
may be used solely for definitional purposes,
they may also be used in connection with bank
generation of agency reports on a coded or
automated basis. The ISBAR classification
structure provides the substantive basis of bank
coding of accounts that would be appropriate
for the agency reports. The ISBAR coded
report Instructions state agency requests for
information in terms of the elements of the
classification structure. With appropriate identification and adaptation of its own classifica-

procedures, and what types of banks can
use it to advantage?
What role have commercial banks had in the
design and development of the system?
Will the use of the system be compulsory for
banks?
Does ISBAR involve any changes in the substance of information that banks report?
Does the use of ISBAR put any particular
requirements or restrictions on banks'
internal recordkeeping procedures?
What reports are covered in the system?
How will future changes in reporting requirements be handled in the system?
Will the ISBAR approach be extended to
other types of reports?
How does ISBAR fit into the general efforts
of the banking agencies to deal with problems of reporting burden?
What additional materials on the system are
available and how can they be obtained?

(1) What is ISSAR, how will it be used in
report procedures, and what types of
banks can use it to advantage?

ISBAR consists of a set of materials and
procedures that provide, as an alternative to
present procedures, a systematic basis for:
(a) banking agency requests for information
from commercial banks; (b) the definition of
the information requested; (c) bank generation
of this information; and (d) bank reporting of
the information to the agencies.
In the ISBAR approach, each line of information requested in agency reports that deal
with balance sheet and related items is completely defined in terms of an appropriate combination of the elements of a standard classification structure. This single, comprehensive
structure embraces the definitional needs of
all the reports covered in the system. The
system's main operating documents are the
classification structure, a Dictionary defining
each element of that structure, and a set of
report Instructions that specify the information
requested in the reports in terms of the elements of the classification structure.
For banks, ISBAR will have four separate

be interested in pursuing such transmission
methods on an experimental basis with a limited
number of banks.

tion system to the ISBAR structure, a bank
could-if it so chose-use the ISBAR coded
Instructions as the basis for compiling some or
all of the data needed for agency reports by
retrieval procedures that would be stated in
terms of the classifications used in its own
records.
A bank that has already coded or automated
some of its accounts or files for internal purposes may,. therefore, have some interest in
examining the details of the ISBAR materials
to determine the feasibility of using ISBAR to
facilitate the coded or automated generation of
some of the information needed for agency
reports. Such an examination would be a
necessary part of the bank's determination of
the reports for which it might be worthwhile to
link, and adapt as appropriate, its present procedures to the ISBAR materials.
(c) Another potential use of the ISBAR
materials is as an input to systems planning for
banks that are designing new or revised information systems or automated recordkeeping
systems. Such a bank may be interested in a
detailed examination of the ISBAR materials
if it has any thought of incorporating agencyreport-generation features into its new systems
or if it has any concern about the relationship
between reporting requirements and its systems
design.
(d) ISBAR also provides banks with alternative procedures with respect to the physical
form of reporting information to the three
banking agencies. Banks are given two types
of options in this regard. In the first, the data
being reported may be identified either by
ISBAR codes or by existing procedures. In the
second, each bank will have the choice of transmitting the data either by use of the present
report forms or by means of computer printouts
or punched cards in standard formats to be set
by the agencies. Any bank that can put its
report returns on computer file may find it convenient to transmit reports by the new alternative methods-even if it does not use other
ISBAR procedures and materials.
Eventually, consideration may be given to
extending the options in this area to include
transmission of the data by magnetic tape or
terminals. A few Federal Reserve Banks may

(2) What role have commercial banks had
in the design and development of the
system?
Commercial banks have played a major role
in the d~sign and development of ISBAR. The
project ioriginated when the group of banks
making up the ad hoc Steering Committee on
Banking Information suggested to the banking
agencies that the banks and the agencies work
together to develop an approach to reporting
that would permit banks to deal with reporting
requirements in a more effective manner. Under
the chairmanship of M. H. Schwartz, then
a vice president of the First National City
Bank of New York and now Director of the
Division of Management Information and Telecommunications Systems of the Atomic Energy
Commission, and later Robert K. Wilmouth,
Executive Vice President of the First National
Bank of Chicago, the Steering Committee set
the general direction of the project and established the major scope and characteristics of
the approach. The members of the Steering
Committee stressed to the agencies that banks
had a pressing need in the area of reporting and
that the project was directed toward that need.
The Committee persuaded the agencies to
establish the project and to implement the
resulting system as an operating alternative for
banks.
Throughout the project, the Steering Committee continued to give general guidance to
the project staff. In addition, consultations
with operating personnel at each of the Steering
Committee banks during various stages in the
work contributed to significant improvements
in the project results.
Commercial bank participation will continue
during the present review period. Comments
by individual banks on this preliminary version
will be taken into account in preparing the
operational version to be issued in 1975.
As a supplement to the reviews by individual
banks, The American Bankers Association
(ABA) and the Bank Administration Institute
(BAI) have established a joint steering com-

departments and not others. The bank may
adopt the procedures as soon as ISBAR becomes operational or at any time thereafter.

mittee to provide a focal point for industry
reaction to the ISBAR approach. The members of the committee are Virgil Dissmeyer,
Senior Vice President and Cashier of the Northwestern National Bank of Minneapolis; Graham P. Dozier, III, Comptroller of Wachovia
Bank and Trust Company, N.A., of WinstonSalem; Gail M. Melick, Executive Vice President of Continental Illinois National Bank and
Trust Company of Chicago; Paul Laskoski,
Senior Vice President (Finance) of The First
Pennsylvania Banking and Trust Company of
Philadelphia; James E. Lodge, Director of the
Operations and Automation Division of The
American Bankers Association; and Thom McCord, Principal Bank Counselor of the Bank
Administration Institute.
The committee is recruiting a group of banks
to experiment with procedures for linking
ISBAR into their own accounting and information systems. Any bank interested in obtaining more. information about the experiment
should contact the ABA or BAI staff representative on the committee.
In addition, the ABA and BAr are prepared
to organize appropriate forms of educational
sessions on ISBAR if a need becomes evident.

(4) Does ISBAR involve any changes in the
substance of information that banks report?

ISBAR does not add to, or otherwise change,
the substance of reporting requirements. The
system focuses on procedural and format mattersand on improvement, codification, and
systematization of definitions within the context
of the existing substance of reports. Whether a
bank uses ISBAR or the current procedures, it
will report the same items of information at
the same levels of detail for the same reports.
Any future changes that occur in reporting
requirements as a result of changes in banking
agency information needs will be reflected in
the ISBAR operating materials-just as they
will be in the current reporting forms-but the
ISBAR procedures do not in themselves initiate
such changes.
(5) Does the use of ISBAR put any particular requirements or restrictions on
banks' internal record keeping procedures?

(3) Will the use of the system be compulsory for banks?

ISBAR does not impose, or presuppose, any
particular design for banks' accounting, recordkeeping, or information systems. Each bank
that uses the ISBAR materials will continue to
determine its own procedures in accordance
with its individual needs.
This is true in particular for the classification
and coding systems used by a bank to identify
and differentiate its accounts. ISBAR does provide the substantive basis for the classification
structure that is needed for such identification
of accounts as is relevant to reporting requirements. But the particular format, organization,
and level of detail of the ISBAR classification
structure does not constitute a recommended
standard system of classification for bank use.
For its own purposes, each bank may have
need for additional classification detail and for
a different organization of its classification system. Similarly with respect to the code num-

Nothing in the ISBAR approach is compulsory for any bank. Use of the system is completely at the option of each commercial bank.
A major purpose of the approach is to provide
the flexibility of alternative procedures to. those
banks that can use such procedures to advantage, while also allowing each bank the option
of continuing under existing procedures.
Each reporting bank has the option to use
the system or not. If a bank does choose to
use the system, other options arise on how
and to what extent. Thus, a bank may use the
ISBAR materials for anyone, or any combination, of. the uses discussed under Question
( 1) . It may use them for all of the reports
covered by the system that are applicable to
it or for any subset of reports or even for parts
of reports. It may use the approach in connection with some of its files or. some of its
27

adapting its procedures, each bank will still be
free to design its systems to meet its own needs.

bers that represent the classification structure,
ISBAR does not require or provide a particular
coding system for use by banks in the coding of
their accounts. The code numbering used in
the ISBAR documents is for identification and
reference within the ISBAR materials and for
coded communication of information requests.
These ISBAR codes are not intended or designed for bank use in coding accounts. A bank
that makes any use of the ISBAR materials
would use a code numbering system in the
classification of its accounts that is appropriate
for its own needs.
However, because ISBAR does not put any
particular requirements on banks' recordkeeping procedures, each bank using the ISBAR
materials in connection with coded or automated generation of agency reports will have
to prepare and maintain a conversion table
linking the ISBAR classifications, codes, and
procedures to its own records, classifications,
codes, and procedures. This conversion table
would be the operating link between the ISBAR
report Instructions, which are stated in terms
of the ISBAR codes, and the information as it
is organized and identified in a bank's records.
As mentioned in connection with Question 2,
some experimental exercises in performing the
kind of substantive identification necessary to
prepare such conversion tables will be organized by the joint ABA-BAI steering committee.
The absence of any requirements on banks'
internal procedures, other than for a conversion
table, does not mean that a bank's decision to
use the ISBAR materials may not have some
effect on its recordkeeping procedures. It is unlikely;thatthere will be any significant impact in
those cases where the bank is using the ISBAR
materials solely for definitional purposes, although even here clarification of reporting
requirements may result in some change in internal records. But there may be a significant
impact in those instances where a bank is using
the ISBAR materials as an input to its systems
design activities or where a bank is trying to
adapt its existing procedures to take advantage
of the ISBAR approach. However, even where
use of the ISBAR materials strongly influences
the direction that a bank takes in designing or

(6) What reports are covered in the system?

When ISBAR becomes operational in 1975,
it will cover the definitional requirements of
reports that meet all of the following conditions: (a) The reports are issued by one or
more of the three Federal banking supervisory
agencies (including the Treasury's Foreign
Exchange Reports collected through the Federal Reserve Banks); (b) they are submitted
by commercial banks; and (c) they request
information on balance sheet and related items.
Certain reports meeting these criteria are excluded as unsuited for the ISBAR approachfor example, reports that request judgmental
or qualitative information and some one-time
or infrequently collected reports that ask for
highly detailed, specialized information. Within
the indicated scope, the system covers all reports-whether regulatory, supervisory, or statistical; whether mandatory or voluntary;
whether completed by all banks or by a sample
of banks.
Reports that will not be explicitly covered
in the 1975 version of the system include:
(a) banking agency reports that do not deal
with balance sheet and related items, such as
the Report of Income; (b) reports collected
from bank trust departments, Edge Act subsidiaries, and bank holding companies and
other nonbank affiliates; (c) reports of other
Federal agencies, such as the Securities and
Exchange Commission and the Internal Revenue Service; and (d) reports of State banking
supervisory agencies.
Similarly, information needs of commercial
banks for purposes other than compiling the
covered reports are not explicitly incorporated
in the structure. While there is a considerable
overlap between the information that banks
need for reporting and what they need for their
own purposes, banks presumably require classification detail for internal purposes that is not
provided in the ISBAR structure. Because the
additional details needed vary from bank to
bank, the commercial bank Steering Committee
on Banking Information recommended that the
28

Once the system is operational, all ISBAR
documents will be maintained and updated as
needed. Whenever a change in reporting requirements entails a change of any kind in the
structure, notice to this effect, along with the
necessary revisions and additions to all relevant
ISBAR documents, will be sent immediately
to all banks that have the ISBAR materials. In
the 1975 version, these documents will be
issued ina looseleaf form so that new and
revised pages may be incorporated readily.

project not attempt to develop a comprehensive
classification structure covering all of the information needs of commercial banks.
The preliminary version of the operating
materials has not yet incorporated some of the
reports that will be covered in the 1975 operational version. The incorporation of the remaining reports to be covered will undoubtedly
result in some changes in the ISBAR classification structure and other materials. These
changes will be in addition to those resulting
from industry and agency review of the preliminary version. The specific reports covered
in this preliminary version and those to be included in the 1975 version of ISBAR are listed
in the additional descriptive material that is
available on request.

(8) Will the ISBAR approach be extended
to other types of reports?

An extension of ISBAR to the balance sheet
reports requested by other agencies-for example, the Internal Revenue Service, the
Securities and Exchange Commission, the Department of Commerce, and the State bank
supervisors~would probably require the addition of considerable detail, but not necessarily
a drastic redesign of the structure. From the
beginning of the project, the intention has been
to cover these reports eventually, but the administrative problems involved in doing so have
not yet been faced. A feasibility study will
undoubtedly be conducted after the system has
been satisfactorily. implemented in its present
scope and is working smoothly.
Extension of the approach to the Report of
Income or to reports submitted by bank holding
companies would raise difficult problems of
substance. These reports might require quite
different parallel structures rather than incorporation into the present structure. It is unlikely that the project will be able to turn to
those areas until there has been considerable
operating experience with the present coverage
of reports.

(7) How will future changes in reporting requireme!1ts be handled in the system?

When ISBAR becomes operational in 1975,
the classification structure will reflect the definitional requirements of those reports coming
within the scope of the system that are being
collected at that time. Not all future requests
by banking agencies for new or revised information will come within the scope of ISBAR,
but those that do will require prompt preparation and distribution of additional ISBAR
materials. If such requests for information can
be completely defined in terms of the classification structure as it stands, the main changes
required in the material will be the preparation
of coded Instructions for the new requests.
However, there can be no guarantee, or presumption, that future information needs of the
agencies-even if within the general scope of
the system-will be limited to those that can
be defined in terms of the ISBAR classification
structure as it stands at any time. When agencies do request such new information that is not
so definable, appropriate changes will have to
be made in the ISBAR classification structure
as well as in the Instructions. However, agency
procedures will be established in order to prevent unnecessary changes in the structure and
to keep to a minimum those changes that are
required.

(9) How does ISBAR fit into the general
efforts of the banking agencies to deal
with problems of reporting burden?

The burden of banking agency reports on
banks· arises both from the substance of the
information to be reported and from the procedures used in requesting, defining, and transmitting the information. ISBAR as such deals

structure. Part 2 also includes a technical Guide to
Operating Documents that describes in detail the

only with matters of reporting procedure; it
takes the substance of reports as given. However, ISBAR was also intended and designed
to be used as a comprehensive framework for
approaching problems of substance and to give
technical support for those agency programs
dealing with such problems. The ISBAR materials provide an effective mechanism for the
kind of detailed and comprehensive comparison
of the contents of existing reports that would
be needed. in. any program of evaluation and
restructuring of the substance of reports. Moreover, the system will provide an efficient mechanism for communicating to reporting banks the
results of revisions of individual reports or
restructuring of groups of related reports. Also,
because it provides a sharp and immediate
focus on definitional questions, the systemonce it is operational-will have a significant
role to play in the design and introduction of
new requests for information.

formats, contents, and Use of these documents.
PART 3 contains the coded report Instructions
for all covered reports except the Report of Condition, which is in, Part 2. Because all banks do
not prepare the same reports, a bank requesting
Part 3 will receive only those coded report Instructions that are relevant to it.
PART 4 comprises supplementary docUments
that are not needed for the definitional use of the
system but that may be of interest for design and
evaluation purposes to those banks that desire to
use the system in connection with coded or automated retrieval of information for agency reports.
A description of these supplementary documents
is contained in the Guide to Operating Documents
of Part 2.

Each part of the ISBAR presentation is available separately upon request. Banks may request as much of the material as they wish; but
because the entire presentation is of considerable size, banks with no previous exposure to
the system may find it helpful to examine the
descriptive Part 1 before deciding to request
the operating documents of Parts 2 and 3 or
the supplementary documents of Part 4.
The documents making up the presentation
may be obtained by writing to the Board of
Governors of the Federal Reserve System, the
Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, or any
Federal Reserve Bank. The specific addresses
to which requests should be sent are listed on
the inside of the back cover of this pamphlet.
Requests should specify which parts of the
presentation are wanted.
In addition to providing the documents, the
agencies will endeavor, within the limits of the
availability of knowledgeable personnel, to
discuss the use of the ISBAR materials with
interested banks. Banks or groups of banks
that are interested in arranging discussions
between their staffs and the project staff should
address inquiries concerning the possibility of
such discussions to any of the agency offices
listed on the inside of the back cover.

(10) What additional materials 01"1 the system are available and how can they be
obtained?

The full presentation of ISBAR is contained
in a set of documents that provides both a more
complete description of the system and copies
of the operating materials. The presentation
bears the general title Information System for
Banking Agency Reports and is divided into
four major parts:
PART 1 is a general description of the system
-its origins, purposes, scope, characteristics, uses,
and operating materials and procedures. It also
discusses the relationship of the system materials
and procedures to banks' own recordkeeping and
information systems.
PART 2 consists of the various operating documents required to implement the procedures of
the system.. These include the classification structure needed to specify the lines of the covered
reports, a Dictionary defining each element of the
structure, and a set of coded report Instructions
that specify the Report of Condition and its schedules in. terms of the elements of the classification

AVAILABILITY OF
ISBAR DOCUMENTS

The various parts of the ISBAR presentation and .additional copies ()f this pamphlet may be
obtained by writing to any of the offices listed below. (Comments on the approach may also
be sent to the same addresses.)

Bank Report Reform Project
Board of Governors of the Federal Reserve System
Washington, D.C. 20551
Department of Banking and Economic Research
Office of the Comptroller of the Currency
Washington, D.C. 20219
Division of· Research
Federal Deposit Insurance Corporation
Washington, D.C. 20429

Bank Report Reform Liaison Officer
Federal Reserve Bank of Boston
Boston, Massachusetts 02106

Bank Report Reform Liaison Officer
Federal Reserve Bank of Chicago
Chicago, Illinois 60690

Bank Report Reform Liaison Officer
Federal Reserve Bank of New York
New York, New York 10045

Bank Report Reform Liaison Officer
Federal Reserve Bank of St. Louis
St. Louis, Missouri 63166

Bank Report Reform Liaison Officer
Federal Reserve Bank of Philadelphia
Philadelphia, Pennsylvania 19101

Bank Report Reform Liaison Officer
Federal Reserve Bank of Minneapolis
Minneapolis, Minnesota 55480

Bank Report Reform Liaison Officer
Federal Reserve Bank of Cleveland
Cleveland, Ohio 44101

Bank Report Reform Liaison Officer
Federal Reserve Bank of Kansas City
Kansas City, Missouri 64198

Bank Report Reform Liaison Officer
Federal Reserve Bank of Richmond
Richmond, Virginia 23261

Bank Report Reform Liaison Officer
Federal Reserve Bank of Dallas
Dallas, Texas 75222

Bank Report Reform Liaison Officer
Federal Reserve Bank of Atlanta
Atlanta, Georgia 30303

Bank Report Reform Liaison Officer
Federal Reserve Bank of San Francisco
San Francisco, California 94120
31

Full text of Economic Review (Federal Reserve Bank of San Francisco) : September 1974

FRASER