Full text of Federal Reserve Notes : May 1977

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Federal Fteserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO

•

MAY 1977

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

COLDWELL REPORTS
RISING PRODUCTIVITY
Federal Reserve expenditures have

risen far more slowly than govern
ment expenditures generally, accord
ing to a report made by Governor
Phillip Coldwell last month to the
Senate Banking Committee.
System expenditures increased at an
8.5-percent annual rate from 1974 to
1977, compared with a 15.9-percent
rate for the Federal government.
Coldwell said the Fed's favorable
cost-control situation was achieved

despite new regulatory responsibili
ties and the impact of inflation.

bank
holding
companies were
brought under the System's jurisdic
tion. The Fed now supervises about
1,900 holding companies—which
control about two-thirds of the na

tion's bank deposits—and processes
an average of nearly 850 applications
a year.

Coldwell said the same type of dra
matic increase has occurred in other

bank supervisory areas, such as in
ternational banking. The consumercredit field also has grown substan
tially in recent years, beginning with
passage of the Truth in Lending Act in
1968. Congress has passed nine oth
er consumer-protection acts or

BALLES NOTES
INFLATION PROBLEM

Financial market participants are be
ing forced to readjust their thinking to
the possibility of a "six and six" year—
that is, to a 1977 economy where
prices and real output are both rising
almost six percent, instead ofthefivepercent rates originally forecast by
most economists. This readjustment
has already caused trouble in the
markets, according to John J. Balles,
President

of

the

Federal

Reserve

Bank of San Francisco, in a speech
last month in Phoenix to a group of
Arizona community leaders and Re
serve Bank directors.

amendments since that date.

"Efforts to improve productivity and
decrease costs are in the forefront in

all of the budgeting and planning

guidelines and procedures followed
by the Board and Reserve Banks,"
Coldwell stated, "and we believe that
these efforts have succeeded. As an

indication of this improvement, actual
output per manhour in our measur
able output functions was estimated
to have increased by almost 12 per
cent in 1976 following an increase of
6 percent in 1975."

Turning to central-banking opera
tions, Coldwell noted the sharp in
crease in volume in recent years—
especially wire transfers of funds,
currency operations, and the proc
essing of food stamps and checks.
In particular, Reserve Banks handled
a 182-percent increase in wire trans
fers between 1970 and 1976. Nearly
75,000 funds transfers are now nego
tiated each day, representing more
than

$150

billion

in bank-to-bank

transfers.

The Fed provides central-banking
services to the nation through a net
work of 50 offices employing 26,650
people. Its 1977 operating budget
amounts to $753 million.

Reserve Bank processing of currency
rose by a third during the 1970-76
period, and food-stamp processing
rose by 58 percent. In 1976 alone, the
Fed

As an example of the upsurge in the
Fed's workload, Coldwell cited super
visory activities arising in the holdingcompany area. In 1970 the Fed su
pervised 121 multi-bank holding
companies and acted on an average
of 32 applications a year. With the
passage of the 1970 amendments to
the Bank Holding Company Act, one-

sorted

and

counted

7

billion

pieces of currency and processed
and destroyed 2 billion food stamps.
Coldwell noted that the System now
handles about 50 million checks a

day, or 85 percent more than in 1970.
Checks processed in 1976 totalled
12.3 billion items. Over the past six
years, the Fed has established 11

(continued on page 2)

Balles referred especially to the "in
flation jitters." which have recently
dominated the financial markets be

cause of the first quarter's price news.
"The recent price statistics are in
deed sobering, even allowing for the
special circumstances which pushed
up prices at a double-digit rate in early
1977," he said. "In contrast to the

gradual deceleration of last year, we
have recently experienced a worri
some speed-up in prices, reflecting
such factors as weather problems,
fiscal problems, and the importing of
foreign inflation."
The Fed official explained, "Part of the
problem is the weather-induced
sharp rise in food costs, but the prices
of other consumer goods have also
accelerated, while the prices of serv
ices have continued to outstrip those
of other consumer purchases. And
households may expect further diffi
culties in coming months, since the
wholesale prices of consumer goods
have risen at an 8.2-percent annual
rate since last fall, and those in
creases should soon be felt at retail."

(continued on page 4)

iftlfifSfiliii11 rf?f,f}|j: jjj^:

^p^iiiiK
J.H. Makin

MAKIN NAMED

VISITING SCHOLAR
John H. Makin, Associate Professor of

Economics at the University of Wash
ington, has been appointed to serve a
six-month term as a Visiting Scholar
at the Federal Reserve Bank of San
Francisco.

The San Francisco Fed inaugurated
the Visiting Scholar program to en
courage creative research and the
interchange of ideas by practicing
economists. Scholars from Stanford,

Ohio State, the University of Oregon,
and the University of Chicago have
recently held such appointments with

the bank. The most recent Visiting
Scholar was Milton Friedman, the
1976 Nobel Laureate in Economics.

In addition to his teaching position, Dr.
Makin

is a

consultant to the U.S.

Treasury Department's Office of In
ternational Affairs. He received his

B.A. in Economics from Trinity Col
lege and an M.A. and Ph.D. from the
University of Chicago. Dr. Makin has
taught at the University of Wisconsin,
the University of Virginia, and the
University of British Columbia. He
also served as Senior International

Economist with the Treasury Depart
ment.

As an author and editor, he has pro
duced nearly 40 articles and books in
the areas of international monetary

The Bank of Marin Building in downtown San Rafael (California) serves as
headquarters office for Independent Bankers Trust Company.

Welcome To The District

INDEPENDENT BANKERS TRUST COMPANY
Independent Bankers Trust Company
capped what it termed "its most suc
cessful year of operations ever" by
becoming a member of the Federal
Reserve Bank of San Francisco last
month.

During 1976, trust assets for Inde
pendent Bankers Trust Company in
creased 32 percent to over $35 mil
lion. The trust enjoyed an increase in
fiduciary business in virtually all major
categories, and it expects to increase
its staff in 1977 as it gears up for
continued growth.
Independent Bankers Trust Company
is part of northern California-based
Independent Bankshares Corpora
tion. This multi-bank holding com
pany was formed in 1973 by three
previously unaffiliated banks—the
Bank of Marin, the Bank of Sonoma

County, and the First National Bank of
Cloverdale—and in 1974 acquired
the Bank of Lake County.
Today the four subsidiary banks oper
ate through 23 offices in Marin, So
noma, Mendocino and Lake counties.
In 1976, the corporation's resources
grew over 15 percent, approaching
$300 million. Through Independent
Bankers Trust Company, the cor

poration providestrust services to
customers of its subsidiary banks.

His books include Elements of Mon

Donald F. Murray, a vice president
and Director of Independent Bank-

ey, Theory of Money, Theory of Mac
roeconomics, Theory of Economic
Policy and Macroeconomics. He was

shares, serves as President and
Chairman of the Board of Independ
ent Bankers Trust. He replaced

co-editor of Eurocurrencies and Na

Richard O.Kwapil, who retired this
March. Murray is also a Senior Vice

economics

and

macroeconomics.

tional Financial Policies.^

President and Director of Bank of

Marin and a Director of Bank of Lake

County.
Directing the day-to-day operations
of the trust company is Executive Vice
President Hale M. Knight, who joined
the trust early in 1975 with over 20
years of experience in the field. He is
supported by six other officers at the
trust's two offices in San Rafael and

Santa Rosa, ^jfp
COLDWELL REPORTS
(continued from page 1)

new regional check-processing cen
ters to clear checks more rapidly and
reduce float.

The System also, by establishing a
program of direct deposit of Federal
payments, has cut government dis
bursement costs by about $7 million
annually. The Fed's data-processing
and communications facilities

now

handle about 51/2 million government
payments monthly in this way. Again,
through its automated clearinghouse
arrangements, the Fed capitalizes on
electronic transfers as an alternative

to making commercial payments by
check.

Coldwell

noted

that the increased

workload has been managed despite
a 5-percent reduction in Reserve
Bank employment since 1974. "The
Board believes that its review and

budget processes have created a
cost-consciousness throughout the
System and that this has resulted in
better productivity, cost efficiency
and service to the public," he con

cluded.^

FED AMENDS

DISCLOSURE RULES
The Federal Reserve Board of Gover

The decision of the Financial Ac

nors amended its Regulation Z (Truth
in Lending) last month to require ad

favor historical-cost accounting in the

restructuring of debt should provide a

variable-rate clause in a contractthat

framework within which lenders can

may increase the cost of credit to a
customer. The amendment goes into

work

effect on October 10.

month.

Under the new rule, creditors must

In commenting on an earlier FASB
memorandum last July, the Chairman
expressed concern that some variant
of present-value accounting—rather
than accounting based on historical
experience—might be applied to

fies an earlier proposal on the subject
made last fall.

FED UTILIZES NEW

DESTRUCTION EQUIPMENT
Most people spend a great deal of
their waking hours trying to accumu
late money. The Federal Reserve
Bank of San Francisco has the unique
responsibility of getting rid of it— and
in an environmentally acceptable
manner.

In the last two years, the Bank has
installed equipment that incorporates
the latest state-of-the-art technology
for this purpose. In 1976, the Bank

verified and then destroyed over $2.2
billion in unfit currency and $1.1 billion
more in food stamps.
To handle this task, the San Francisco

Branch installed a high temperature
incinerator

in

1975,

and

other

branches began operating even new
er equipment during the past several
months. Later this year, Los Angeles
will install the largest destructor in this
District.

All the equipment installed in recent
months shreds currency instead of
burning it. In a disintegrator, three

counting Standards Board (FASB) to

vance disclosure when there is a

disclose that the annual percentage
rate is subject to increase. This simpli

Money to burn

BURNS DISCUSSES
ACCOUNTING STANDARDS

Creditors using variable-rate clauses
also will have to spell out the condi
tions under which the rate may in
crease, including identification of any
index to which the rate is tied and any
limit on the increase. Moreover, the
advance disclosure must include the

way an increase can be carried outsuch as by an increase in payment
amounts, a change in the number of
scheduled payments, or an increase
in the amount due at maturity.
In the case of home-mortgage trans
actions only, creditors must give
numerical examples to show how the
variable rate operates. The examples
are to be based on a hypothetical
increase of one-quarter percentage
point in the annual percentage rate,
made either through a change in the
number of scheduled payments or an
increase in the amount of those pay
ments, ifr
landfill. The machinery can handle as
much as 600 pounds an hour.

The disintegrator is automaticallyfed,
permitting currency to be destroyed
without any people being present.
Through a series of timers and microswitches, the currency and food
coupons are fed to the disintegrator

effectively,

Federal Reserve

Chairman Arthur F. Burns said last

banks and other financial intermedia

ries. At that time, he argued that the
widespread imposition of such ac
counting standards for debt restruc
turing could threaten the viability of
financial institutions and impede the
potential performance of the econo
my. FASB subsequently issued
another draft last December confin

ing the new standards to troubled loan
situations.
In a recent letter to Marshall S. Arm1

strong, Chairman of FASB, Burns said
the latest proposal would avoid the
major sources of the Board's earlier
concerns. While pointing out some
technical difficulties in the draft, he

said the proposed standards would
enable banks to operate effectively in
adjusting loan contracts to the chang
ing credit needs and financial circum
stances of their customers.

Nevertheless, Burns added a cau

tionary note concerning the
application of present-value account
ing. "While the proposed statement is
largely devoid of present-value ac
counting requirements, the Board
wants to express its concern that, in
the discussion of the basis for its

The

enclosed in a specially constructed

conclusions, FASB appears to have
accepted a rationale that could lend
support to an expanded application of
present-value accounting standards
to troubled debt restructuring situa

pieces of currency or food coupons
are agitated between the sets of

lead-lined, walled room—the enclo

tions." He concluded, "The Board

sure being for security and the lead

blades until the material is cut small

lining for sound deadening.^

continues to feel that the application
of such accounting standards to

rotating blades create a scissors-like
action against two fixed blades that
are

set

at

close

tolerances.

one bundle at a time. The whole unit is

enough to pass through a quarter-

commercial banks and otherfinancial

inch-diameter

intermediaries would be contrary to
the public interest and therefore

screen.

After

com

pacting, the residue is hauled away
with normal building waste to serve as

should be rejected."^

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FED ISSUES

BALLES NOTES

cent sometime this year, but he sug

MONEY ORDER RULES

(continued from page 1)

gested to his listeners that they
"should keep their eyes on the dough

Balles noted a more favorable outlook

The Federal Reserve Board of Gover

nors last month approved applica
tions made by two bank holding com
panies for the issuance of money
orders and similar consumer-type
payment instruments.

In granting authority, however, the
Board made it clear that this activity
would not be added to the list of

activities generally permitted for bank
holding companies under its Regula
tion Y. Instead, the Board said it would

process such applications on a caseby-case basis.

in the production sector, with real
GNP rising at close to six percent this
year. "The severe winter interrupted
and postponed a strong expansion
that was evident around the turn of the

year, and so it practically guaranteed
a sharp rebound right about now." He
said that the recovery from the firstquarter shortfall, plus the continued
growth of consumer and business
demand, should generate a tempo

rarily high rate of growth during the
current quarter and set the stage for a
healthy advance in late 1977 and
early 1978.

nut

instead of the hole"—on total

employment rather than unemploy
ment. Already, in the past two years,

an expanding economy has created
more than five million new jobs. And in
1977, he suggested, basic expan
sionary forces could boost total em

ployment about three percent for the
second straight year—a very strong
increase in historical terms.

"But the one fly in the ointment is
inflation," Balles continued. In this
connection he noted the long-term

inflationary threat created by the pro
liferation
of
Federal
spending

programs—and
The Board noted that the wholesale

money-order business in this country
is dominated by a few nonfinancial
companies that are not subject to the
Federal Reserve System's reserve
requirements. Unless a degree of
competitive equity can be established
under the present statutory frame
work, it argued, new competition in

The Fed official noted that the unem

ployment rate could fall below 7 per-

consequent

sub

stantial deficits—over the past dec
ade. "The $112-billion combined

nies to compete with thedominant
organizations in this business on an

deficits of the 1975-76 fiscal years

equal basis, by permitting what is
essentially a consumer-oriented de
mand deposit business to be con
ducted by nonbank affiliates of mem

need to overcome recession, but how
can we defend a deficit of like size in

might be explained in terms of the

the expansionary 1977-78 period?"
Because of this fiscal situation, Fed

ber banks."

eral demands on credit markets could

national scale.

In addition to increased competition,
the Board said the public could bene

calendar 1976, in contrast to the usu

al cyclical decline in such borrowing

"Such equity cannot be achieved if
some competitors are subject to re
serve requirements while others are

fit from reduced costs and increased

during a recovery period. "That pro

be roughly the same this year as in

this business would not develop on a

not," the Board ruled. "In such unique

convenience to purchasers. It noted
that money orders have proved to be
particularly useful to persons of limit

circumstances, the Board finds that

ed resources who do not or cannot

there are public benefits associated
with enabling bank holding compa-

practically maintain checking ac

jected demand comes just at the time
when private credit demands are ris
ing, and thus generates significant
upward pressure on interest rates
when coupled with the demands gen

counts.^

erated elsewhere."^