Full text of Federal Reserve Notes : July 1977

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Federal Reserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO

JULY 1977

Serving Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah & Washington

c^eral Reserve Bonk
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FED SYSTEM HANDLES

NEW YORK EMERGENCY
The world's largest financial center
unexpectedly shut down for a full
business day because of the New
York blackout, but emergency proce
dures ensured a

continued flow of

funds through the nation's payments
system. Still, immense difficulties had
to be overcome because the linchpin
of that system—the Federal Reserve
Bank of New York—was out of com

mission during the emergency.
On a typical business day, the New
York Fed—

* Handles about 5'/2 million checks

and

almost

8

million

pieces

of

currency;

* Processes over $70 billion in
securities and Federal-funds trans

actions through its electronic tele
communications system;
* Buys and sells over $3'/2 billion in
government-securities, in its role as

Manager of the Federal Reserve Sys
tem's Open Market Account, that is,
the executant of the central bank's

key monetary-policy decisions;
* Buys and sells hundreds of mil

The Manhattan skyline appears under the Brooklyn Bridge, darkened after the power
blackout July 13, and with its lights twinkling across the East River July 14 after most of
New York's electricity was restored. (Wide World Photos)

lions of dollars of securities in U.S.

markets on behalf of foreign central
banks and monetary authorities, in its
role as the Federal Reserve's agent in
dealing with foreign organizations.
All of these operations were shut
down on Thursday, July 14, when the
Governor and the Comptroller of the
Currency ordered New York City
banks to close because of the power
blackout. Early that morning, Dale
Cunningham, Assistant Vice Presi

morning, Tony J. Salvaggio, Senior
Vice President of the Dallas Reserve

Bank and Chairman of a System Sub
committee on Payment Mechanisms,
notified Fed offices throughout the
country to put into effect the proce
dures developed for just such an
emergency.

At the outset, Senior Vice President
Kent Sims, who administers the San
Francisco Fed's discount window,

notified the Officers in Charge of the
Reserve Bank's five offices that the
Federal Reserve would accommo

date any reasonable request from a
member bank for assistance needed

as a result of the unexpected closure
of the New York money market.
In San Francisco, a team of Federal

dent of the New York Reserve Bank,

Reserve officials assembled by Presi
dent John J. Balles worked out a plan

dispatched a wire to all twelve Federal
Reserve Districts advising them of the
New York bank holiday. Later that

tronic payments normally destined for
New York could be properly handled.

to make sure that checks and elec

In addition, San Francisco Fed offi

cers participated in a System-wide
conference call linking San Francisco
with offices in New York, Washington

(continued on page 2)

NEW YORK EMERGENCY

JACKSON URGES ATTENTION

(continued from page 1)

TO CREDIT JUDGMENTS
Legislation to protect consumers

San Francisco Bank's First Vice Pres

tain the freedom to make distinctions

ident, John B. Williams, was in Wash

between customers, according to

ington, D.C. on business, but through

Federal Reserve Governor Philip C.
Jackson, Jr., speaking before a recent
meeting of the American Bar Asso

specific creditor for a specific trans
action. It must exist also in qualitative
and quantitative terms. When deter
mining that an applicant is creditwor
thy, a creditor decides that the proba
bilities that the debt will be repaid are
sufficiently high so that the creditor is
willing to assume that risk of nonpay

ciation. He added that standards of

ment."

and elsewhere to plan an overall
strategy for the continued functioning
of the nation's payments system. The

the conference call he was able to

participate in the development of the
emergency plan.

from credit discrimination has been

beneficial, but creditors still must re

creditworthiness

must

reflect

the

Out of these consultations came a

creditor's risk-premium charges as

procedure for handling checks expe
ditiously without going through the
New York Fed. Normally checks

well as the characteristics of the ap
plicant.

drawn on New York banks and sent to

"When we limit by law a creditor's
legal capacity to judge creditworthi
ness, we are tampering with a major
component of our economic system,"
Jackson said. "I believe the Congress
in framing the Equal Credit Opportuni
ty Act tried to walk the fine line be
tween arbitrary, capricious and

the West Coast, are forwarded to the
San Francisco Fed for transmission to
the New York Fed. The New York Fed

then sorts them by individual banks
for debiting and crediting to the ap
propriate accounts.

In this emergency case, Reserve

irrational considerations of creditwor

Banks in San Francisco and else

thiness on one hand, and a wide

where "fine sorted" their checks so

latitude for creditors to make individu

that they could be presented directly
to New York City banks for collection,
thus preventing a backlog of checks
for sorting at the New York Fed. This
approach could not be adopted at all

al credit judgments on the other. The
statute is generally successful in
making this fine distinction."

Reserve Bank branches, so checks in

Portland and Salt Lake City were
flown to Seattle for sorting and reforwarding.

However, Jackson argued that there
is not a great deal of margin for errors
in credit judgment. Increased losses
and collection costs tend to drive up
the cost of the distribution of goods
and services for all consumers.

Senior Vice President John Carson,

who coordinated many of these oper

"All of us need to be reminded that

ations at the San Francisco Reserve

creditworthiness is a concept which
exists only in the value system of a

Bank, said that these adjustments
otherwise have

been tied up—waiting for power to be
restored to New York's computers
and check-processing equipment.

These emergency measures contin
ued around the clock throughout
Thursday and into Friday, July 15. San
Francisco Reserve Bank officials par
ticipated in another conference call at
5:30 a.m. Friday, and heard the good
news that the message switch at the
New York Federal Reserve Bank was

back in operation. For the first time in
a day-and-a-half, communications
could flow smoothly from coast-tocoast.

In the aftermath of the blackout, some

hibit the use of distinctions in extend

ing credit. Many usury laws, he said,
amount to price-control legislation.
These laws have seldom worked ex

cept where the ceiling was placed
high enough to enable most transac
tions to take place. Even then, highrisk

borrowers

were

discriminated

against, because the price ceiling
was set below the rate necessary to

provide for their needs.
He argued that greater attention also
should be paid to the concept of
geographic
discrimination—com
monly known as redlining. To provide
more factual analysis for creditors, he
urged local governments to produce
maps showing older areas which
have not suffered abandonment or

vandalism. In addition, charting of
foreclosures by location, amount and
type of loan would help lenders esti
mate the probabilities of future market
price stability in blighted central-city
neighborhoods.
In the search for solutions to credit

enabled the Bank to move millions of

dollars that would

Jackson cited "usury" laws as an
example of society attempting to pro

problems remained unresolved. Be
yond the physical processing of
transactions lay the more difficult
issues of payment of interest and
possible penalties on debts or other
transactions that would normally
have been cleared on the day of the
blackout. In particular, bankers and
lawyers wrestled with the difficult
question of what interest payments
would be due on debts left unsettled

for the extra day, such as transactions
in Federal funds and negotiable time
certificates. But apart from these con
tinuing problems, the emergency
showed conclusively that the nation's
payments system can handle unex
pected crises with considerable

efficiency. ^

inequities, Jackson warned against
overreacting with government rules
and regulations. "If we can resist the
temptation to demand that govern
ment 'do everything,' it is more likely
that the private sector will become
active."

Concluding, he said, "The past record
on this type of approach has been
poor, for seldom have we given it a
real chance to work. Impatient to get
quick results, mistakenly thinking that
government action only costs the
other fellow, we continue to demand
more and more intervention. Yet it is a

rare case when passing a law and
throwing money at it cures any

problem.'"^

Welcome to the District
FIDELITY NATIONAL BANK
The most recent Northern California
bank to become a

member of the

From left to right (front row) Robert E. Scott, Business Manager, Mt. Hood Community
College; John Piacentini, Owner, Plaid Pantry Stores; Angelo Carella, Vice President in
Charge, Portland Branch, Federal Reserve Bank of San Francisco; James Conlon,
Director, Bureau of Engraving and Printing;Steve Hickok, Field Representative, Senator
Mark 0. Hatfield's Office; Joseph McEvoy, Divisional Vice President and Controller,
Meier and Frank Company; David Orkney, President, G.I.Joe's, Inc.;(Back Row) James
Durkheimer, Secretary-Treasurer, Wadhams and Company; FrankJensen, Fred Meyer
Savings & Loan Association; and Percy Loy, President, Kubla Khan Food Company.

Federal Reserve System has a rich
tradition even though it's only four
months old. Fidelity National Bank is

TREASURY OFFICIAL LAUDS PORTLAND PLAN

the

in

In a recent interview with the New

Concord (California) but its office is in
the 140-year-old Don Salvio Pacheco

Yorker magazine, James A. Conlon,

newest

financial

institution

Adobe.

The adobe building, the oldest in
Concord, is a city and state historical
landmark. Thus, businesspeople and
families conduct their banking busi
ness in the restored home of a Mexi

can grandee.

Director of the U.S. Bureau of Engrav
ing and Printing, glowingly described
the "Portland Plan" developed by the
Federal Reserve office in that city for
promoting use of the two-dollar bill.
"The Portland Fed got together with
some of the big retail people and
persuaded them to give the two a

kamp heads the Fidelity National
Bank management team. In his diver

dollar bills had been virtually static at
the beginning of the year, but they
then increased dramatically as retail
ers began marketing the two. The Fed

very heavy that the two could be
useful to stores everywhere—fewer
bills to handle, fewer to count."

ones meanwhile have been slashed

sified career, he has served in both

large and small banks, and in virtually
all phases of banking from lending to

The Portland Fed's shipments of two-

office currently distributes an average
of $44,000 in twos a day, compared
with about $19,000 before the begin
ning of the campaign. Shipments of

shot. The evidence from Portland is

Chairman and President Rein Veer-

independent action can replace gov
ernment expenditure. Your efforts
have paid off in real savings to tax
payers."

15 percent.

administration.

Conlon recently flew to Portland and
presented certificates of appreciation
to those who engineered the "Port

Percy Loy, President of Kubla Khan
Food Company and a member of the

land Plan." He told the audience that

Federal Reserve's Consumer Adviso

Veerkamp served as president of

their efforts

banks in Colorado and Florida before

practical benefits which can accrue
from cooperative government-citizen

ry Council, spearheaded the cam
paign in collaboration with Vice Presi
dent Angelo Carella of the Portland
Fed. Loy convinced retailers to utilize
the two widely in making change.

returning West to organize Fidelity
National. He received a BA degree
from the University of California at Los
Angeles, and also attended the Ston
ier Graduate School of Banking at
Rutgers University.

had demonstrated the

action.

Participants in the meeting also re
ceived letters of commendation from

Rounding out the senior officer team

Senator Mark O. Hatfield. "In your
hard work we find both economy and
inspiration," Hatfield said. "For those

are Executive Vice President Thomas

determined to show that individual

Stark and Vice President and Cashier

ideas can help mightily in solving the
problems of government, your partici
pation in this promotion is a significant
example. You have clearly shown that

Robert Vaughn.
Fidelity National is located in a neigh
borhood shopping center not far from
Concord's central business district,

so the bank offers shopper's hours
rather than banker's hours. Fidelity is
open from 9 to 5 and to 6 p.m. on
Fridays. The drive-up windows have
similar extended banking hours.

Large chains and supermarkets that
had never ordered twos began stock
piling them. Retailers overcame the
basic objection in using twos—no
room in the cash drawer—by simply
moving the twenty underneath and
putting the two in its place.
Loy and Carella noted that wide
spread acceptance of the note could

save taxpayers from $4 to $7 million
"We're one of the few places in the

nation," sums up Veerkamp, "where
you can drive up to a state historic site
and take out a home-improvement
loan—all on the same visit." Ufa

annually, since twos go twice as far as
ones at half the printing cost. About 60
percent of the total currency stock
presently is made up of one-dollar

bills.%

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BOARD SUPPORTS REGULATORY REFORM

FED ISSUES RULING

ON WIRE TRANSFERS

ports regulatory reform and the sim
plification of existing rules and proce

System has reduced the overall vol
ume of the reports it receives by about
seven percent in the last year and a

dures, Governor J. Charles Partee

half.

ernors last month amended its regu
lation on check collections (Reg J) to

He was

Turning to the Regulatory Reform Act,

tween member banks.

testifying in regard to the Regulatory
Reform Act (S.600) which provides for

the Fed official said that the Board of

a detailed review of the effects of the

clarification of certain key features
such as the "sunset" provisions of the
legislation. These provisions require
the termination of regulatory enforce
ment authority, or even an entire agency, in the event that no reform
plans are enacted within a prescribed
time period.

The Federal Reserve System sup

recently told the Senate Committee
on

Governmental

Affairs.

regulatory process on an agency-byagency and also industry-by-industry
basis.

Partee said that Federal legislation
and implementing regulations often
have the unintended effects of intro

The Federal Reserve Board of Gov

cover the wire transfer of funds be

Governors would like to see some

Under the amended regulation, which
becomes effective September 1, the
unchanged section on checks will
become Subpart A, and the new ruling
on wire transfers will be codified un

der a new Subpart B. Up to now,
procedures for wire transfers have
been covered by Reserve Bank op
erating circulars.

ducing rigidities and imperfections
into industries and markets. "All too

Partee noted that there were no ex

frequently the results have been a
lessening in competition, a reduced

plicit provisions in the bill providing for
the continuation of a variety of essen
tial functions that are not regulatory in

resilience

to

deal

with

economic

change, and a higher and more rigid

nature, but which account forthe bulk

structure of costs and prices which
the consuming public must inevitably

of the Federal Reserve's activities.

bear."

Partee said that in banking the costs

of compliance with regulations are
often high. He cited the numerous
reports that must be filed with bank
regulatory agencies, or that must be

During the past 10 years, wire trans
fers have increased sharply from $6V2
trillion in 1967 to $35 trillion last year.
The average wire-transfer transac
tion amounts to roughly $2 million.

These would encompass "central
banking, monetary policy, oversight of
the Reserve Banks, operation of the
discount mechanism, bank supervi
sion and incidental regulations of the
Federal Reserve necessary to carry

The new Subpart B of the regulation
concerns only the wire transfer of

out these functions."

tions

funds.

It does

not deal with other

electronic payments such as those
processed through automated clear
ing houses, or point-of-sale transac
where

electronic

means are

used to verify checks or to charge
customers' bank accounts for pur

filled out and kept accessible for en
forcement purposes. He called this a
hidden tax, imposed by the regulators
on the regulated, that is ultimately
passed on to consumers. He noted,

Thus he argued, "In view of the prob
lems associated with the sunset pro
vision, the Board would urge a nar
rower and more specific delineation
of the aspects of banking and finance

Governors is preparing a third subpart
to Regulation J, which will deal with
the processing of payments recorded

however, that the Federal Reserve

to be covered by the bill." ^

on magnetic tape. ^

chases.

However,

the

Board

of