Full text of Federal Reserve Notes : September 1977

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Federal Reserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO

.

SEPTEMBER 1977

Serving Alaska, Arizona,.Cal|f^mia^ H^yyaji, Idaho, Nevada, Oregon, Utah & Washington
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CHECK TRUNCATION
MOVES AHEAD
Less than six months from now, the
Federal Reserve Bank of San Fran

cisco will begin "truncating" Treasury
checks, in another move designed to
speed processing and cut handling
and paper-work costs through the
use of computers.

Truncating means that the San Fran
cisco Fed—along with all the other
Reserve Banks across the nation-

will not have to return government

checks to the Treasury. Currently
some 700 million Treasury checks

are processed annually by Reserve
Banks and then shipped back to
Washington, D.C. The new system will
eliminate this massive and expensive
trundling of tons of paper—some
2900

miles

in

the

case

of

San

Francisco—and improve the efficien

KICKING OFF PAFTAD—Shown with President John J. Balles of the San Francisco Fed

(second from left) are several members of the steering committee for this year's Pacific

Trade and Development Conference. They include (from left to right)Lawrence Krause,
The Brookings Institution; Kiyoshi Kojima, Hitotsubashi University, Tokyo;Hugh Patrick,
Economic Growth Center at Yale University: and Peter Drysdale, Australian National
University, Canberra.

cy of the payments mechanism.
FED BANK HOSTS PACIFIC CONFERENCE
At the San Francisco Fed the switch

over is scheduled for next February.
At that time, the bank will begin gener

Over 30 policy-oriented economists
and government officials from 15

ating magnetic tapes and microfilm
copies of the checks. The tapes and

countries attended the Ninth Pacific

Trade and Development Conference

Bank's President John J. Balles told

microfilm will

at the Federal Reserve Bank of San

the delegates in his welcoming com

be forwarded to the

Treasury Department's disbursing of
fice. The checks themselves will be

Francisco last month. The week-long
conference was organized by a com

retained for about seven years in

mittee which included Dr. Lawrence

storage areas convenient to each of

Krause (Brookings Institution), Prof.

the bank's offices.

Hugh Patrick (Yale University) and Dr.
Michael Keran (Federal Reserve
Bank of San Francisco).

Pilot tests for the system have been

underway for over a year and will
continue through 1977. When trunca
tion goes into effect, the Treasury will
introduce a new type of paper check.
The check will have all the necessary

The theme of this year's meeting was
the Pacific area's mineral resources

and their impact on global economics
and politics. The delegates repre

data encoded on it. As the checks

sented

are processed by computer-driven

resource-poor Pacific Basin coun

both

resource-rich

and

"The success of this series of meet

ings is reflected in its durability
through the years," the Reserve

ments. "This shows that the confer

ences have been addressing impor
tant issues and that the peoples and
governments of Pacific Basin coun
tries are interested in the results of

your deliberations.
"In addressing a major economic
issue—natural resources in an age of
apparent scarcity—this conferencedeals with a

number of unresolved

issues which have generated conflict
between nations and between private
and public sectors. By analyzing the

tries, as well as a balance of both

(continued on page 4)

developed and developing nations.

(continued on page 4)

BALLES ANALYZES

NEW RETIREMENT

INFLATION "TAX"

ACCOUNT DATA

FED ANNOUNCES RULES
FOR CASH DISCOUNTS

Americans are continuing to suffer
from the "silent yet severe tax" of

Starting next month, the Federal Re

The Federal Reserve Board of Gover

serve Board of Governors will add a

nors last month amended its Truth in

inflation, President John J. Balles told
a Town Hall audience in Los Angeles.

line to its monthly survey of time-andsavings deposits as a means of gain
ing more specific information on cer
tain types of retirement accounts. The

Lending Regulation (Reg Z) by adopt
ing provisions permitting discounts
for customers that use cash instead
of a credit card. The amendments,

Board will collect information on the

which became effective immediately,

"Many people claim we should get
used to a 'moderate' rise in prices of
around five percent a year," Balles
stated. "What would happen in our
children's generation if we became
used to an inflation rate of five per
cent?"

Citing just one example, he noted that
an auto costing $4,600 today would
cost over $40,000 in the year 2020.
While admitting that wages would rise
also, he said that under the progres
sive income-tax system the Federal

tax bite for the worker now earning $3
an hour would rise from roughly zero
to 30 percent of income. This would
cut deeply into real income through
the mechanism of the regressive tax
of inflation.

Balles also pointed out that inflation
still stands at an unacceptable level.
He said that consumer prices had
increased at a 9-percent annual rate
in the first half of 1977—almost twice

as fast as in the preceding half-year
period.

amount outstanding and most com
mon interest rate paid on individual
retirement accounts and Keogh de
posits with original maturities of three
years or more. Accounts with shorter
original maturities will continue to be
included with savings and short-term

deposits."^

give merchants the option of offering
discounts of up to five percent of the
credit-card price.
Cash discounts were specifically au

thorized by the Fair Credit Billing Act
in 1975. However, some critics ar

gued that the Act might be interpreted
to permit merchants to add sur
charges for credit transactions in

noted that an upsurge in Federal

stead of making discounts for cash
transactions. Last year, Congress
enacted new legislation to make a
clear distinction between surcharges

government spending had created a

and discounts. The new Fed amend

cumulative deficit amounting to $337
billion over the past 15 years. This
series of budget deficits consistently

ments incorporate these clarifica
tions into Reg Z by detailing rules
merchants must follow in applying the

pulled monetary policy off target by
supporting an excessive growth of

discount.

money and credit.

The amendments outline three spe-'

traced primarily to government poli
cies first adopted a decade before. He

Curing the problem means bringing
the Federal budget into reasonable
balance, while gradually slowing the
growth of the money supply. He also

cific examples of pricing systems
merchants might employ to carry out
the discount policy. For example, a
merchant could post or tag goods

said that a firm fiscal and monetary

with a single price. Under this dis
count pricing system, the single price

stance would help bring down the

would be the cost for a credit-card

certain amount of inflation to reduce

price of money—interest rates. He
added that this point was widely mis

deducted from this price for cash

the unemployment rate to respect
able levels. Referring to recent work

understood in the controversy over

customers. A merchant could also

rising money-market rates this spring.

The Fed President criticized the argu
ment that the nation has to accept a

done by his research staff, he said
that the typical response to a high rate

customer, while a discount could be

use a "two tag" system with one price
for credit cards and another for cash.

"Too few people clearly understand

Under a third alternative, the mer

consumer confi

the long-term effect of price expecta
tions on interest rates, and the way
such expectations can offset other

chant could simply offer a fivepercent discount off the prices
charged to credit-card customers.

dence, forces households and busi

market influences. If lenders expect

of inflation is more rather than less

unemployment. This is because rapid
inflation

reduces

nesses to save more and spend less,

more inflation, they'll demand a pre

and thereby reduces the level of busi

mium to protect themselves against
an expected loss in the purchasing
power of their money. And borrowers
will be willing to pay that premium
because they expect to repay their

ness activity.

"As a policy matter," he added, "we
are not faced with a choice between

competing alternatives, but rather
with a straightforward imperative to
fight inflation if we want to conquer
unemployment."

The Board also included a provision
on advertising disclosure. If the lower
cash price were advertised, mer
chants would have to state clearly
that the price was not available to

credit-card customers, f

loans with dollars worth less than the

ones originally borrowed."
Balles said our recent experience has
shown the crucial importance of infla

"Consequently," he concluded, "we
should put the horse before the cart

The Fed official said that the severe

tion expectations in determining the

and work to curb inflation if we want to

inflation

direction of interest rates.

keep interest rates in check."^

of the mid-1970s can be

OVERCHARGE REFUND
GUIDELINES DELAYED
The Federal Reserve Board of Gover

nors last month delayed issuance of
guidelines that would spell out uni
form procedures for handling loanovercharge refunds, to give bankers
and consumers time to make addi

tional comments on the proposals.

O. L. Christensen

FACILITIES PLANNING
DIRECTOR NAMED
Oren L. Christensen last month ac

cepted the post of Director of Facili
ties Planning for the Federal Reserve
Bank of San Francisco. In this capaci
ty he is responsible for the bank's
planning, design and construction of
new facilities—primarily the develop
ment of plans for a new San Francisco
Headquarters.

All three Federal bank regulators—
the Federal Reserve System, the
Comptroller of the Currency, and the
Federal
Deposit
Insurance
Corporation—have
pressed
for
guidelines that would enable them to
treat loan-overcharge refunds uni
formly. Over the last two years, the
three agencies have been conduct
ing consumer-oriented examinations
to confirm compliance with Truth-inLending and other consumer-type
legislation. These examinations have
disclosed discrepancies that would
require some banks to make refunds
to their customers for overcharges.

In a public discussion of the guide
lines, the Board said it was imperative
that both banks and customers be

treated fairly. Some members stated it
would

Before joining the San Francisco Fed,
Christensen was Assistant to the Vice
President of Finance and Administra

tion at Stanford Research Institute

International in Menlo Park, Califor

nia. Previously, he headed the
Ground Station Planning Group of the
Air Force Satellite Tracking Station
Network as an employee of Lockheed
Missiles and Space Company.
Christensen

obtained

extensive

R. C. Dietz

be unfair to order banks to

make full refunds for the entire eightyear-period that Truth-in-Lending

R. A. Johnston

had been on the books. Others con
tended that the statute of limitations

would apply in some instances.

BANK RELATIONS
UNIT REORGANIZED
The Federal Reserve Bank of San

Chairman Arthur Burns commented

that a banker who is "thoroughly hon
est" but whose "arithmetic is inade

quate" should not necessarily have to
repay eight years of overcharges to

experience in civil and structural
engineering after attending Fresno
State College and the University of

customers.

Santa Clara. He recently completed
courses in facilities planning at the
Graduate School of Design at Har
vard University. He holds State of

The Board also discussed whether

California licenses in both Civil and

payments.

Structural Engineering. Christensen
is a member of a number of honorary
societies, including Beta Gamma Sig
ma, Chi Epsilon, Phi Beta Kappa,

members said these matters would

Sigma Xi, and Tau Beta Pi.^

Francisco last month organized a
separate Bank Relations Department,
as a means of improving services to
member

banks.

The

unit

will

be

headed by Robert C. Dietz, Vice Presi
dent, and by Robert A. Johnston,
Assistant Vice President and Manag
er. The unit will report directly to
Senior Vice President Kent O. Sims,

refunds could be handled by allowing

instead of being lodged (as before) in

banks to offer shorter terms and lower

the Bank's Research and Public Infor

interest

for additional comment to consumers

mation Department. Working together
with the management of the Bank's
five branches, the new department
will be responsible for developing
programs designed to expand Feder
al Reserve membership and to solve

and bankers. *fa

broad types of service problems, ifr

on

loans

Federal

instead

of cash

Reserve

staff

be incorporated in a redrafted section
of the guidelines that will be offered

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FINANCIAL DATA

PACIFIC CONFERENCE

CHECK TRUNCATION

FOR SMALL BUSINESS

(continued from page 1)

(continued from page 1)

Federal

issues, proposing solutions, and pub
lishing the results of your delibera
tions, you will be able to help policy
makers and the general public make
better informed judgments about
natural-resource problems."

Reserve

Chairman

Arthur

Burns last month proposed that a
committee of economic and statisti

cal experts develop a system to pro
vide financial

data that would aid

small businesses.

"I believe that focusing on the needs
of small business, including the need
for an appropriate data base, would
be both wise and progressive," Burns
said in replying to a request for com
ments on a bill under consideration by

Besides the Federal Reserve Bank,

other supporters of the conference
included the Asia Foundation, the
Ford Foundation, Crown-Zellerbach

Corporation,

Exxon

Corporation,

Bank of America, Standard Oil of

the Senate Small Business Commit

California, Bechtel Corporation, Utah

tee.

International, Inc., Crocker National
Bank, International Institute for Eco
nomic Research, and the Foundation

Part of the bill would require Federal
regulatory agencies to disclose the
volume

of commercial-bank credit

extended to commercial and industri

for Research in Economics and Edu

cation. Several foreign agencies also
provided support.

al borrowers. However, the Chairman

argued that this information would be
of limited use, partly because it would
not reveal the current volume or cost

A summary of the proceedings will be
published this fall as a supplement to
the quarterly Economic Review of the

of bank lending to small businesses.

Federal Reserve Bank of San Fran

On the other hand, the Board an

nounced support of provisions to

cisco. The full proceedings, including
all of the conference papers and
discussion notes, will be published at

establish a

a later date.

council to evaluate the

impact of government programs on
small business. The Board also en

At the close of the conference, the

dorsed legislation requiring the Presi
dent to make an annual report to
Congress, in which he would suggest
programs and policies designed to

steering committee announced that
at least two future meetings are
planned. They are scheduled for Aus
tralia in March of 1979, and for South

meet the needs of small business.'ifp

Korea in early 1980.'if*

reader-sorters, the data will automati

cally be recorded on magnetic tape
and the check will be microfilmed.

The tapes will then be processed by
the Treasury, with computer recon
cilement of accounts.

The Treasury has scheduled the
start-up of the truncation program so
that it coincides with the depletion of
current stocks of card checks around

the first of the year. At that time the
familiar green cardboard checks will
become a thing of the past.

Truncation is yet another in a series of
improvements initiated by the Treas
ury Department and the Federal Re
serve System to capitalize on the
economies offered by computer tech
nology. One of the most significant
programs now in effect is the elec
tronic transfer of government pay
ments for such recurring transactions
as social security, supplementalsecurity income, civil-service retire
ment,

railroad

revenue-sharing

retirement

checks.

and

Every

month about $31/2 billion is disbursed
electronically throughout the nation.
The new system has entirely eliminat
ed over five million paper checks

each month, t^