Full text of Review (Federal Reserve Bank of Dallas) : April 1981

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WR., ALLARDIC'Il

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April 1981
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An International Perspective on the Effects of Monetary
Targeting Procedures

12

"Fed Quotes"

13

Regulatory Briefs and Announcements

16

Now Available from the Federal Reserve

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

An International Perspective
on the Effects of Monetary
Targeting Procedures
By Nancy

J. Kim elman

The ultimate objective of monetary policy is to
improve economic welfare by promoting economic
growth, full employment of resources, and price
stability. Data on such broad economic measures
cannot be gathered with sufficient frequency or
promptness, however, to allow these variables to
be used as the operating guides for policy. Monetary authorities have thus come to rely on more
readily observable economic indicators, such as
interest rates or money growth, as the means of
evaluating the impact of their policies. Often the
authorities focus on a particular variable and
strive to achieve a value for the variable that they
believe will be consistent with the longer-run goals.
In so doing, the authorities can be said to have
chosen an intermediate target variable.
Prior to the 1970's the monetary authorities of
most countries chose either short-term interest
rates or some measure of bank credit to serve as
the intermediate target variable. In the past decade
the monetary authorities of most industrialized
countries have switched to money growth targets.
Most observers view this trend as indicative of
stronger determination on the part of monetary
April 1981/Voice

authorities to achieve greater price stability, for
the reduction of money growth is a prerequisite to
that end.
The American audience has been well familiarized with experiences the United States has had
with monetary targeting procedures over the past
few years. Surprisingly, however, Americans are
relatively uninformed about the experiences with
such targeting in other countries. The comparisons
provided in this article on the behavior of money
growth before and after the initiation of targeting
in six major industrialized countries-Canada, the
Federal Republic of Germany, France, Japan, the
United Kingdom, and the United States-reveal
that to a limited degree, the growth rate of money
has fallen and become more stable in most of the
countries since the adoption of monetary targets.
In addition, the evidence suggests that all the
countries except the United Kingdom have hit their
monetary targets with approximately the same
degree of success. Collectively, the results imply
that a proper assessment of Federal Reserve behavior should be undertaken on a comparative as
well as an absolute basis.
1

Monetary Policy Framework

OPERATIONAL
TOOLS

INFLUENCE

Examples
Reserves
Money Market Rates
Monetary Base

INTERMEDIATE
TARGETS

Short·Term Rates
Money Stock
Bank Credit

In deciding to make the transition to monetary
targeting, monetary authorities appear to have
been ~articularly influenced by the fairly general
experIence of inflation in the 1970's and the adoption of flexible exchange rates in 1973. In the past,
market interest rates have proved to be unreliable
indicators of the true thrust of monetary policy.
Because of the difficulties associated with determining the timing, direction, and magnitude of
appropriate adjustments in interest rate targets,
monetary authorities often produced money growth
that was unstable in the short run and inflationary
in the long run. Faced with the inability to restrain
inflation and promote economic growth, the authorities gradually reduced their preoccupation with
interest rates and paid greater attention to the
behavior of monetary aggregates. This trend was
reinforced by a body of research indicating that
monetary authorities could come closer to achieving their ultimate objectives if the rate and instability of money growth were reduced. 1
The institution of a more flexible exchange rate
system in 1973 afforded an expanded opportunity
for the adoption of monetary targets. Indeed, one
of the major advantages cited for more flexible
exchange rates was that of greater scope for inter-

1. See, for instance, William Poole, "Benefits and Costs
of Stable Monetary Growth," in Institutional Arrangements
and the Inflation Problem, ed. Karl Brunner and Allan H.
Meltzer, Carnegie-Rochester Conference Series on Public
Policy, vol. 3 (Amsterdam, New York, and Oxford: NorthHolland Publishing Company, 1976), pp. 15-50.
2

ULTIMATE POLICY
OBJECTIVES
Examples

Examples

Adopting monetary objectives

INFLUENCE

Economic Growth
Price Stability
Interest Rate Stability

national monetary independence. Under the fixed
exchange rate system that prevailed throughout
the postwar period until 1973, official intervention
by a country to maintain the exchange value of its
currency caused variation in the country's monetary base. Under the current system of flexible rates, movements in the exchange rate can
take the place of those international reserve
transactions; consequently, a country's monetary
base can be more insulated from international
influences. 2
By 1977 the six countries considered in this
study had adopted some form of monetary targeting. For Germany and the United States, monetary targets had been in place since the early
1970's. Canadian monetary authorities shifted
their policy orientation in late 1975. But for France
and the United Kingdom, money growth over 1977
was to be the first test of the new procedures.
Japan began formally announcing forecasts in
early 1978, after paying informal attention to the
aggregates for several years.

2. It has been shown that under the fixed rate system,
considerable latitude still existed for sterilizing the
monetary base effects of international events when a
country so desired. Nevertheless, the flexible rate system
provides more automatic insulation from such shocks
than does a fixed rate system. For one study on the
possibilities for sterilizatirm, see Victor Argy and
Pentti J. K. Kouri, "Sterilization Policies and the
Volatility in International Reserves," in National
Monetary Policies and the International Financial System,
ed. Robert Z. Aliber (Chicago and London: University of
Chicago Press. 1974), pp. 209-30.
Federal Reserve Bank of Dalla.

Money Growth Rates in Major Industrialized Countries
50 PERCENT CHANGE IN M·2 MONEY MEASURE--------

40-

(Annualized Quarter·to·Quarter Changes in Seasonally Adjusted Figures)

30-

CANADA

2010 -

0------------------------

40 - - - - - - - - - - - - - - - - - - - - - - 302010 -

0-10 - - - - - - - - - - - - - - - - - - - - - - - 30 - - - - - - - - - - - - - - - - - - - - - - - GERMANY
2010 -

0-10 - - - - - - - - - - - - - - - - - - - - - - -

40 - - - - - - - - - - - - - - - - - - - - - - - 30 20 - ,...."""-.
10-

0-----------------------40 - - - - - - - - - - - - - - - - - - - - - - - 302010-

0-10 - - - - - - - - - - - - - - - - - - - - - - - - -

30----------------------20-

10 -

0-10

-r----.-~-__r-..,r____,-...,.-_,_-..,r____,-__r-...,..-

I '72 I

I '74 I

I '76 I

I '78 I

I '80 I

SOURCES: International Monetary Fund.
Federal Reserve Bank of Dallas.

April 1981/Voice

8

Inflation Rates in Major Industrialized Countries
25 PERCENT CHANGE IN CONSUMER PRICE INDEX - - - - - - -

20-

(Annullized Quarter·to-Qulrter Changes in seasonally Adjusted Figures)

1510-

50 - - -.....- - - - - - - - - - - - - - - - - 20 - - - - - - - - - - - - - - - - - - - - - - 15-

10-

5-

0-------------------------

20 - - - - - - - - - - - - - - - - - - - - - - 15-

10-

5-

GERMANY

0------------------------

50 - - - - - - - - - - - - - - - - - - - - - - - -

40-

302010-

0-10 - - - - - - - - - - - - - - - - - - - - - - -

40 - - - - - - - - - - - - - - - - - - - - - - 3020-

10-

0------.. . - ---------------

20 - - - - - - - - - - - - - - - - - - - - - - 15-

10-

5-

o .....,r----r--T""-"'T""'-.,.-"'T""-T-~....__-_.,.-"'"T'""-"I"I '70
I '74
I '76 I
I '78
I '80 I
SOURCES: International Monetary Fund.
Federal Reserve Bank of Dallas.

4

Federal Reserve Bank of Dallas

The objectives adopted by the individual countries were based on a variety of money measures,
ranging from "central bank money" in Germany
to a "broad liquidity measure" in the United Kingdom. Generally, authorities that chose a broad
measure of money did so in order to simplify the
task of monetary control. By targeting a broad
measure, monetary authorities need not estimate
nor evaluate shifts among the various components
of the money stock. In contrast, the authorities
that chose to target more narrow measures of
money did so in order to emphasize the means-ofpayment function of money. Since the choice of
an aggregate represents a complex theoretical and
practical decision, most countries have continued
with the aggregate (or set of aggregates) originally
chosen.
In four of the countries studied-Canada, Germany, the United Kingdom, and the United Statesthe targets are now expressed as ranges. In France
the target is considered a ceiling for money growth,
while in Japan, a specific growth rate forecast is
announced. The rationale for the adoption of a
target range is to allow, to a certain degree, the
fine tuning of monetary policy to specific economic
circumstances.
The countries can also be classified by their
policy implementation techniques. Japan and
France both employ credit controls as the principal
method of adjusting the money stock. In contrast,
Canada, Germany, the United Kingdom, and the
United States have traditionally relied more heavily
on short-term interest rates to implement policy.
Interestingly, none of the countries actually
changed their implementation techniques or money
measures when adopting monetary targets as their
intermediate objectives. 3
Recent money growth
During the 1969-80 period, monetary policy was
conducted in three distinctly different policy environments. From 1969 to 1972, the monetary
3. On October 6, 1979, the Federal Reserve System
announced a change in operating procedures for the United
States. The adoption of reserve targeting measures-as
well as the downplaying of Federal funds rate targetshas had some significant effects on the behavior of the
U.S. monetary aggregates, especially money growth variability. These effects are currently being analyzed by
the Federal Reserve.

April 1981/Voice

Table 1
BEHAVIOR OF MONEY GROWTH
IN MAJOR INDUSTRIALIZED COUNTRIES
(Annualized quarter-to-quarter changes, in percent)
Growth rate for M·2
money measure

1969-72

1973·76

197NIO'

11.44
5.98
.52

17.59"
7.87
.45

16.84
4.45"
.26

13.92
8.29
.60

16.19
8.14
.50

13.00
3.71"
.29

11.77
4.36
.37

9.68
3.34
.35

8.20
3.68
.45

18.94
4.68
.25

16.51
6.47
.39

11.56"
3.14"
.27

11.41
10.04
.88

17.05
9.43
.55

12.22
5.13"
.42

Canada

Mean ..................
Standard deviation .......
Coefficient of variation ...
France

Mean ..................
Standard deviation .......
Coefficient of variation ...
Germany

Mean ..................
Standard deviation .......
Coefficient of variation ...
Japan

Mean ..................
Standard deviation .......
Coefficient of variation ...
United Kingdom

Mean ..................
Standard deviation .......
Coefficient of variation ...
United States

Mean .......••.........
Standard deviation .......
Coefficient of variation ...

8.74
7.19
.82

9.54
3.33"
.35

9.05
2.68
.30

1. Through the second quarter of 1980.
• Statistically significant change from the previous period at the 5-percent
level.
NOTE: Coefficient of variation Is tha standard deviation divided by the mean.
SOURCES: International Monetary Fund.
Federal Reserve Bank of Dailas.

policies of the six major industrialized countries
were loosely linked as a result of the existing system of fixed exchange rates. In 1973, most countries
opted for a managed floating of their currencies,
and the policy environment was subsequently
altered, as discussed above. The turbulence generated by the increases in oil prices in 1973 played
a key role in this environment. In the remaining
years, 1977-80, the policy environment was one
in which all six countries used intermediate money
growth targets or forecasts.
In Table 1 the behavior of money growth is examined for each of the three policy environments.
To maintain a degree of consistency in the data
across countries, a uniform measure of the money
5

Monetary Aggregates Used in Establishing Money Growth Objectives
Canada
M-l = currency outside banks and chartered bank Canadian dollar demand deposits (less
private sector float), excluding Government of Canada deposits.
France
M-2 = ready money (currency-coins, bank-notes-and demand deposits with banks, financial
institutions, postal giro system, savings banks, and the Treasury) and quasi-money
(such as time deposits and savings book deposits, bills, savings accounts and plans for
residential purposes managed by banks, financial institutions, or the Treasury).
Germany
Central bank money
Japan
M-2
M-2 + CDs

= currency in circulation plus minimum reserve on domestic liabilities.

= M-l (currency and demand deposits) plus time deposits.
= M-2 plus certificates of deposit.

United Kingdom
Sterling M-3 = notes and coin in public circulation, U.K. private sector sterling sight and time
deposits (including certificates of deposit), and U.K. public sector sterling
deposits.
United States
Old M-l = currency plus private demand deposits adjusted.
M-IA = demand deposits at all commercial banks other than those due to domestic
banks, the U.S. Government, and foreign banks and official institutions (less cash
items in the process of collection and Federal Reserve float) and currency
outside the Treasury, Federal Reserve banks, and the vaults of commercial
banks.
M-lB = M-IA plus negotiable order of withdrawal and automated transfer service
accounts at banks and thrift institutions, credit union share draft accounts, and
demand deposits at mutual savings banks.
Old M-2 = old M-l plus bank time and savings deposits other than large negotiable
certificates of deposit.
New M-2 = M-lB plus savings and small-denomination time deposits at all depository
institutions, overnight repurchase agreements at commercial banks, overnight
Eurodollars held by U.S. residents other than banks at Caribbean branches of
member banks, and money market mutual fund shares.
Old M-3 = old M-2 plus deposits at mutual savings banks and at savings and loan
associations and credit union shares.
New M-3 = new M-2 plus large-denomination time deposits at all depository institutions and
term repurchase agreements at commercial banks and savings and loan
associations.
SOURCES: Bank of Canada: Bank of England: Bank of Franca; Bank of Japan; Board of Govarnora, Federal'Raserva Systam; Garman Fadaral Bank.

6

Federal Reserve Bank of Dallas

Table 2
RECENT MONEY GROWTH OBJECTIVES AND RESULTS
FOR MAJOR INDUSTRIALIZED COUNTRIES
Growth rates
Objective
Monetary aggregate

Canada
M·1 .................
France
M-2 ................ _
Germany
Central bank money ...
Japan
M·23 • • • • • • • • • • • • • • • • •

United Kingdom
Sterling M·3 ..•.•...••
United States
OldM·1 ....•....•••••
M·1A .......•.•.•••.•
M·1B ................
OldM·2 •....•.•.•.•..
NewM·2 ......•.•....
OldM·3 ....•...•.•.•.
NewM·3 .........•.•.

Actual
result

Devlatianl

Percent per annum

Period

6.0-10.0
5.0· 9.0

28.7
7.9

0.0
.0

Dec. 1978-Dec. 1979
Dec. 1979-Dec. 1980

11.0
11.0

14.4
5.7e

3.4
.0

1978:04-1979:04
1979:04·1980:04

6.0· 9.0
5.0· 8.0

5.3
5.8

-.7
.0

1978:01·1979:03
1978:04-1979:04
1979:01·1980:01
1979:02·1980:02

'12.0
11.0
10.0
10.0

12.4
8.5
8.9
7.7

.4
.0
.0
.0

Oct. 1978·0ct. 1979
June 1979·0ct. 1980

8.0·12.0
7.0·11.0

13.2
17.7

1.2
6.7

5.5
5.0
7.3
8.3
9.8
8.1
9.9

.0
.0
.8
.3
.8
.0
.4

June 1978·1979:02
1979:02+

1978:04-1979:04
1979:04-1980:04
1979:04-1980:04
1978:04·1979:04
1979:04·1980:04
1978:04·1979:04
1979:04·1980:04

'3.0·
3.5·
4.0·
5.0·
6.0·
6.06.5-

6.0
6.0
6.5
8.0
9.0
9.0
9.5

1.
2.
3.
4.
5.

From closest bound.
For 1978:02·1979:02.
M·2 + CDs since May 1979.
Estimated change over each four-quarter period.
Revised terget set In October 1979 when It beceme clear that the use of automatic transfer services and
negotiable orders of withdrawal was expanding faster than expected; the original target range was 1.5 to
4.5 percent.
e-Estimated.
SOURCES: Bank for International Settiements.
International Monetary Fund.
Federal Reserve Bank of Dallas.

stock, M-2, was utilized. It should be noted that
only two of the countries studied, France and
Japan, actually targeted M-2 seriously for any
period during the 12 years.
Comparisons of money growth across the three
periods reveal some patterns that bear evidence of
the impact of monetary targeting procedures. In
each country the mean of quarterly observations
on the rate of growth in M-2 was lower in the 3 1/2
April 1981/Voice

years after monetary targets were adopted than
in the preceding 4 years. Interestingly, the reductions in money growth were largest in France,
Japan, and the United Kingdom-three of the four
countries that had adopted targeting procedures
in the midseventies. The declines experienced by
Germany and the United States, whose central
banks had adopted such procedures somewhat
earlier, were smaller. Only in Japan, however, was
7

Monetary Aggregate Objectives and Results
200 TRILLION YEN
24 -

CANADA

23 -

••

180-

2221-

160-

20-

1918 - - - - - - - - - - - -

1,400 BILLION FRANCS

60 BILLION POUNDS STERLING

1,300 1,200 -

135 - - - - - - - - - - - -

55-

FRANCE

UNITED KINGDOM

50-

1,100 -

1,000 -

45-

900-

40 -..".~--------850 - - - - - - - - - - - 180 BILLION GERMAN MARKS
1,700 BILLION U.S. DOLLARS
UNITED STATES

1,500 -

160-

140-

120 -

J

GERMANY~

~

~RAL

-1,000

1,200 -

~

800BANK MONEY

100 -r-I-19-7-7"""1jr--19-7-8-jr-1-9-7-9-'jr--- - "11980

-350
300 -r--'"""""Ir---.,r---.,--.,- 300
I 1977 I 1978 I 1979 I 1980 I

SOURCES: Bank for International Settlements.
Federal Reserve Bank of Dallas.

8

Federal Reserve Bank of Dallas

Table 3
BEHAVIOR OF LONG·TERM INTEREST RATES
IN MAJOR INDUSTRIALIZED COUNTRIES
(Derived from quarterly data, in percent per annum)
Government bond yield'

Canada

1969-72

1973-76

19n-8O'

.................. .

7.31
.51
.07

8.33.87.10

9.561.03
.11

Mean ...................
Standard deviation .......
Coefficient of variation ...

7.43
.75
.10

9.101.21.13

9.49
.98
.10

7.46
.78
.10

9.21.92
.10

6.89·
1.01
.15

7.13
.12
.02

8.27·
1.18.14

7.56
1.14
.15

8.72
.65
.07

12.74·
2.31·
.18

13.23
1.12·
.08

6.22
.49

7.53·
.81·
.11

8.54·
1.06
.12

Mean
Standard deviation .......
Coefficient of variation ...
France

Germany

Mean ....................
Standard deviation .......
Coefficient of variation ..•
Japan

Mean ....................
Standard deviation .......
Coefficient of variation ..•
United Kingdom

Mean ..................
Standard deviation .......
Coefficient of variation ..•
United States

Mean ..................
Standard deviation .......
Coefficient of variation ...

.08

1. For Germany the public authorities bond yield.
2. Through the second quarter of 1980.
• Statistically significant change from the previous period at the 5-percent
level.
NOTE: Coefficient of variation Is the standard deviation divided by the mean.
SOURCES: Internalional Monetary Fund.
Federal Reserve Bank of Dallas.

the reduction in money growth statistically significant at the 5-percent leveU
Comparisons of the average money growth rates
of the first period-the fixed exchange rate
period-with those of the other two periods-the
flexible rate periods-do not reveal similar conformity. After the institution of the flexible exchange rate system, mean money growth was
4. If the monetary targeting periods for Germany and the
United States are brought more in line with the actual
adoption dates of their targeting procedures, the data
generated for such periods are at least consistent with
the conclusions presented in the text. For both Germany
and the United States, a more significant reduction in
average money growth was exhibited concurrent with
targeting than is displayed in the table.

April 1981/Voice

greater in Canada, France, the United Kingdom,
and the United States and lower in Germany and
Japan than it had been in the previous four years.
Moreover, mean money growth in France, Germany, and Japan was lower in the 1977-80 period
than in the 1969-72 period, was greater in Canada,
but was about the same for the two periods in the
United Kingdom and the United States.
An interesting observation suggested by the data
concerns the effect of flexible exchange rates on
intercountry differences in money growth rates.
Although flexible exchange rates were promoted,
in part, to facilitate the pursuit of divergent monetary policies, the intercountry disparities in money
growth rates across countries were smaller under
flexible rates and monetary targeting than under a
fixed rate system.
Viewing the coefficients of variation in money
growth as measures of money growth variability,
indications are that money growth has tended to
become more stable with each change in policy
environment. In the first four years after the adoption of flexible exchange rates, the coefficient of
variation in money growth was about the same
as or somewhat lower than its value in the 1969-72
period for every country but Japan. Additional stability in money growth followed the move to monetary targeting in all countries except Germany,
which exhibited a higher coefficient of variation
in money growth in the targeting period.
Monetary precision and interest rate variation

To this point the impact of monetary targeting has
been discussed in terms of the behavior of a
single money stock measure and without reference
to announced objectives. An alternative approach
is to examine how close the various monetary
authorities have come to achieving their announced
money growth objectives (Table 2). The record for
1977-80 indicates that most of the monetary authorities have had moderate success by this criterion.
The United Kingdom has exceeded its targets by
the largest margin. The other five countries have
displayed almost equal success in meeting their
money growth objectives.
Another issue raised in connection with monetary control is the effect of money growth and
money growth variability on interest rate variation.
Comparing the coefficients of variation for longterm interest rates over the three intervals indi9

cates that interest rates did not become significantly more variable or less variable after monetary
objectives were adopted except in the United
Kingdom (Table 3). The other countries experienced either insignificant increases or declines
from the 1973-76 period. In general, long-term interest rates were more variable under a flexible
exchange rate system than under a fixed rate
system.

Conclusions
In summary, evidence on the impact of monetary
targeting on monetary control is mixed. Money
growth was generally lower in every country in
the post-targeting period than it had been in the
prior four years. Yet, in three countries-France,

the United Kingdom, and the United States-average money growth in the most recent period was
not lower than during the last years under fixed
exchange rates. The variability of money growth
did exhibit a downward trend, however, and the
argument might be made that this has been the
principal manifestation of monetary targeting.
With the exception of the United Kingdom, the
monetary authorities of the industrialized countries
have attained their monetary objectives with almost equal degrees of success. The countries that
specify targets in terms of ranges have usually
come close to or exceeded the upper boundaries
of their monetary targets. The evidence presented
in this article indicates that the record of the
monetary authorities of the United States is not
appreciably worse than that of the authorities of
the other countries studied.

New State Member Bank
Texas State Bank, McAllen, Texas, a newly organized institution located in
the territory served by the San Antonio Branch of the Federal Reserve Bank
of Dallas, opened for business February 17, 1981, as a member of the Federal
Reserve System. The new member bank opened with capital of $750,000
and surplus of $750,000. The officers are: G. E. Roney, Chairman of the
Board; Michael A. O'Connell, President; Joseph V. LaMantia, Jr., Vice
President (Inactive); and Janice Burns, Cashier.

10

Federal Reserve Bank of Dallas

New National Member Banks

Capital National Bank, San Angelo, Texas, a newly organized institution
located in the territory served by the Head Office of the Federal Reserve
Bank of Dallas, opened for business February 6, 1981, as a member of the
Federal Reserve System. The new member bank opened with capital of
$750,000 and surplus of $750,000. The officers are: Frank Junell, Chairman
of the Board; Frank Sanders, President; Donald L. Anderson, Senior Vice
President; and Maxene J. Low, Cashier.
Northfield National Bank, Houston, Texas. a newly organized institution
located in the territory served by the Houston Branch of the Federal Reserve
Bank of Dallas, opened for business March 2, 1981, as a member of the
Federal Reserve System. The new member bank opened with capital of
$1,000,000 and surplus of $1,000,000. The officers are: Earl M. Gilbert, Chairman of the Board; Michael A. Stouffer, President; James F. Lindley, Senior
Vice President and Cashier; Kathleen L. Steck, Assistant Cashier and
Operations Officer.
First National Bank of Dayton, Dayton. Texas, a newly organized institution
located in the territory served by the Houston Branch of the Federal Reserve
Bank of Dallas, opened for business March 9, 1981, as a member of the
Federal Reserve System. The new member bank opened with capital of
$750,000 and surplus of $750,000. The officers are: L. J. Chachere, Chairman
of the Board; Clarence A. Martin, President; Glynn P. Revere, Vice President and Cashier; and Blanche Hargraves, Assistant Cashier.
Temple Bank, N.A., Temple, Texas, a newly organized institution located in
the territory served by the Head Office of the Federal Reserve Bank of
Dallas, opened for business March 23, 1981, as a member of the Federal
Reserve System. The new member bank opened with capital of $625.000
and surplus of $625.000. The officers are: Frank Finch. Chairman of the
Board; Gary Traister, President and Chief Executive Officer; Bill Lodal,
Vice President, Cashier, and Controller; Sonny Crawford, Vice President;
and Sherry Williams, Operations Officer.

April 1981/Voice

11

••GF'ed Quotes ~~
Brief Excerpts from Recent Federal Reserve Speeches, Statements, Publications, Etc.

"In contrast to the historic Keynesian view, the supply-siders share with the
Federal Reserve a conviction that inflation must be brought down. The supply-siders
seem prepared to rely on monetary policy to control inflation. They seem to believe,
as does the Fed, that an essential condition of success is the control of the money
supply. Thus, the basic conditions for constructive policies exist."
"It has always been the belief of the Federal Reserve that monetary policy alone
should not have to carry the burden of fighting inflation. Experience shows that such a
policy is costly in terms of high interest rates, investment and output foregone, and
delay in the results, if any. Fiscal policy has been far too easy over the last few years
to supply real support in the fight against inflation."
Henry C. Wallich, Member, Board of Governors of the
Federal Reserve System (At St. Cloud University,
St. Cloud, Minnesota, February 13, 1981)

"During 1980, despite the pressures arising from sharply higher oil prices and the
strong momentum of large wage settlements and other factors, inflation did not
increase. But the hard fact is that we, as a nation, have not yet decisively turned back
the tide of inflation. In my judgment, until we do so prospects for strong and sustained
economic growth will remain dim. In that connection, forecasts by both the administration and members of the FaMe [Federal Open Market Committee] anticipate
continuing economic difficulties and high inflation during 1981.
"I have emphasized on a number of occasions that we now have a rare opportunity
to deal with our economic malaise in a forceful, coordinated way. As things stand, the
tax burden is rising; yet, in principle the need for tax reduction-tax reduction
aimed to the maximum extent at incentives to invest, to save, and to work-has come
to be widely recognized. Regulatory and other government policies have tended to
increase costs excessively and damage the flexibility of the economy; but realization
of the need to redress the balance of costs and benefits is now widespread. Despite
efforts to cut back from time to time, government spending has gained a momentum
of its own; now, the possibility of attacking the problem head on presents itself. We
are all conscious of the high levels of interest rates and strains in our financial system;
yet, there is widespread understanding of the need for monetary restraint."
Paul A. Voicker, Chairman, Board of Governors of the
Federal Reserve System (Before the Committee on
Banking, Housing, and Urban Affairs, U.S. Senate,
February 25, 1981)
12

Federal Reserve Bank of Dallas

GRegulatory GJ3riefs
andcfinnouncements
Board Adopts Procedures
for Service Pricing
The Board of Governors of the Federal Reserve
System has announced adoption of three sets of
procedures designed to implement the service pricing requirements of the Monetary Control Act of
1980. The procedures supplement the pricing principles announced by the Board on December 31,
1980, and include: (1) procedures for the administration of clearing balances; (2) guidelines for
billing cycles, service charge statements, and payments for service charges; and (3) interim procedures for initiation and review of changes in fees
and services.
Clearing balances
The Board of Governors has authorized Federal
Reserve banks to establish clearing balances for
eligible institutions with zero or small required
reserve balances in order to facilitate access to
Federal Reserve services. Clearing balances help to
avoid account overdrafts and their associated
costs and will earn credits that may be used to
offset charges for Federal Reserve services. Institutions that may establish a clearing balance
include domestic depository institutions, U.S.
branches and agencies of foreign banks, Edge Act
corporations, and Federal home loan banks.
The procedures for the administration of clearing
balances specifically address establishing and
adjusting the clearing balance level, earnings
credits, account maintenance procedures, and fees
for deficiencies.
Service charges
The Federal Reserve System has developed guidelines for statements of charges incurred for Federal
Reserve services and for methods of payment for
those charges by the Reserve Bank customer. The
guidelines include: uniform billing cycles (the
period over ""hich service charges are incurred),
April 1981/Voice

uniform procedures for applying available earnings
credits to offset service charges, a standard interval
between the end of the billing cycle and the
debiting of charges (not offset by earnings credits)
to a designated account, and minimum standards
for descriptive information to be provided to
customers about the services used and charges
incurred.
These guidelines will be implemented with the
start of the pricing of, and full access to, Federal
Reserve check services, now scheduled for August
1981. Prior to that time, each Reserve Bank will
use its own procedures on an interim basis.
The guidelines will provide procedural consistency among Reserve Bank districts. However, the
Reserve banks will retain flexibility in the format
of service charge statements and in the frequency
of service charge notices to their customers.
Before implementation the Reserve banks will
provide Federal Reserve customers with at least
two summary statements of services used and
charges incurred to test these procedures.
Interim procedures for pricing administration
The pricing of financial services supplied by the
Federal Reserve System to financial institutions
will have a significant impact on both the Federal
Reserve and the financial community. The System
has a responsibility to adopt administrative procedures for pricing that will meet the needs of Reserve banks in adjusting to a new environment
and to the needs of the financial community for
advance information about changes.
The procedures are intended to retain flexibility
for the Reserve banks to undertake price and service changes in response to local conditions and,
simultaneously, to develop a common Systemwide framework for pricing decisions. These
interim procedures will be reviewed in 1982 after
the System has gained experience with pricing
administration.

13

Deregulation Committee Proposes
Steps for Phaseout of Interest
Rate Ceilings, Changes Effective
Dates for Two Deposit Categories
The Depository Institutions Deregulation Committee, established by the Congress to provide for
an orderly phaseout of interest rate ceilings on
deposits, has proposed two steps toward the
phaseout.
The committee has requested comment on the
following proposals:
1. To remove the present 12-percent and 113/4percent caps on the maximum interest rate ceiling
that applies to small saver certificates (certificates
of deposit with maturities of 21/2 years or more)
offered by thrift institutions and banks, respectively. The rate ceiling on this category would
continue to be tied to the 21/2-year yield on u.s.
Treasury securities.
2. To establish the following schedule for deregulating deposit rate ceilings generally, by
eliminating rate ceilings on deposits of certain
maturities:
July 1, 1981 " ... Deposits with maturities of
five years or more;
July 1, 1982 ..... Deposits with maturities of
four to five years;
July 1, 1983 ..... Deposits with maturities of
two to four years;
July 1, 1984
Deposits with maturities of
one to two years;
July 1,1985 ..... Deposits with maturities of
six months to one year;
April 1, 1986 .... ,Elimination of all remaining
ceilings (as required by law).
The committee will also consider comment concerning deregulation by means of indexing ceiling
rates to market rates according to this schedule.
In another action the committee amended its
rules to make new ceiling rates established for the
six-month money market certificate and the small
saver certificate effective the day following their
announcement. At present, there is normally a twoday delay (from announcement on Monday to the
effective date on Thursday). The committee took
this action to link the rates on these deposits
more closely to market rates.
14

Fee Set in Eleventh District
for Telephone Advice
Requested for Wire Transfers
In the Eleventh Federal Reserve District. a $1.80
fee is now in effect for telephone advice requested
by originators of wire transfers. As of March 26.
1981, on-line originators requesting telephone
advice will be charged a total of $2.60 for each
such transfer and off-line originators will be
charged $5.30. For transfers of funds not requiring telephone advice. the usual fees continue in
effect. These base charges are $0.80 per transfer
for on-line originators and $3.50 per transfer for
off-line originators.
As a result of an informal survey of depository
institutions, a 90-minute extension (3 :30 p.m. to
5:00 p.m., local time) for intradistrict thirdparty transfers will not be offered in the Eleventh
District at this time. If, at a later time, there
appears to be a need for such an extension, consideration will be given to implementing it.

Federal Reserve Bank of DaUa.

Board Announces Fee Schedule
for Commercial Check Services
The Federal Reserve Board has approved a fee
schedule for its commercial check clearing and
collection services, effective August 1, 1981.
The schedule reflects estimated 1981 direct and
indirect costs of providing check clearing and
collection services to depository institutions, plus
a lS-percent private sector adjustment factor
(PSAF).
On average, the 1981 fees are 11 percent higher
than those published for comment in August 1980.
This is due principally to the higher PSAF, operating costs increasing more rapidly than volume
from 1980 to 1981, and the substantial increase in
the surcharge for consolidated shipments. In the
revised fee schedule the PSAF has not been
applied to shipping costs because shipping services
are provided under contract to the Federal Reserve
from private companies whose prices include the
cost of taxes and financing.
The 1981 fee schedule was calculated by the
Federal Reserve banks using a methodology similar to that used to compute the fee schedule published by the Board in August 1980. The methodology was standardized among Federal Reserve

April 1981/Volce

districts and offices, and the derivation of full
costs was based on the Federal Reserve's Planning
and Control System (FACS).
The structure of the 1981 fee schedule differs
from schedules published earlier in that it shows
a separate surcharge for consolidated shipments
rather than a separate price for each consolidatedshipment deposit type. Since the consolidatedshipment service has been expanded from two to
five deposit types, use of the surcharge simplifies
the price schedule.
The 1981 fee structure may be regarded as an
interim structure in two respects. First, individual
Federal Reserve offices may, in 1981, expand or
repackage the services within this structure in
response to local demand to improve the efficiency
of the payments mechanism. Second, as stated in
the Board's December 30,1980, notice, this fee
structure may be changed in 1982 to price return
items separately and to provide price incentives
to encourage more efficient utilization of resources
in the check clearing and collection service.
Finally, the Federal Reserve banks, as announced in the Board's August 28, 1980, pricing
proposal, are engaged in the three-phase effort to
reduce and/or price float. The fee schedule for
1981 does reflect the higher costs of operational
improvements undertaken in 1981 to reduce float.

15

U'VowJIvailable
Recently issued Federal Reserve circulars, speeches, statements to Congress, publications. etc .. may
be obtained by contacting the Department of Communications. Financial and Community Affairs,
Federal Reserve Bank of Dallas, Station K, Dallas, Texas 75222, unless indicated otherwise. Requests
for circulars should specify the circular numbers.

Circulars

Speeches and Statements

Title 12-Chapter XII-Interest on Deposits: Temporary
Amendment-Rule Regarding Use of Premiums. 3 pp.
Circular No. 81-51 (March 6, 1981).
Iranian Assets Control Regulations: Amendments. 23 pp.
Circular No. 81-52 (March 11, 1981).
Procedures Regarding Clearing Balances, Charges for System Services, and Pricing. 11 pp. Circular No. 81-54
(March 13, 1981).
Amendment to Regulation P: Minimum Security Devices
and Procedures for Federal Reserve Banks and State
Member Banks. 7 pp. Circular No. 81-55 (March 16,
1981).
Revised Bulletin 9 [Collection of Noncash Items]. 14 pp.
Circular No. 81-57 (March 18, 1981).
Corrections to Revised Regulation Q [Interest on Deposits]
Pamphlet and Supplement. 1 p. Circular No. 81-58
(March 19, 1981).
Wire Transfers of Funds: Implementation of Fee for Originators of Wire Transfers Requesting Telephone Advice;
Decision to Defer Indefinitely a 90-Minute Extension
for Intradistrict Third-Party Transfers. 1 p. Circular
No. 81-59 (March 24, 1981).
Request for Public Comment: Acquisition of Thrift Institutions by Banks and Bank Holding Companies. 1 p.
Circular No. 81-60 (March 30, 1981).

Statement by Paul A. Volcker before the Committee on
Ways and Means, U.S. House of Representatives. 10 pp.
March 3, 1981.
Remarks by Henry C. WalIich ("The D-mark as an International Investment and Reserve Currency-Consequences for the Capital Market: An American View")
at the Institut fuer Kapitalmarktforschung, Frankfurt,
Germany. 15 pp. March 5, 1981.
Remarks by Lyle E. Gramley ("Economic Developments
and Monetary Policy") before the Boston Economic
Club, Boston, Massachusetts. 12 pp. March 18, 1981.

Pamphlets, Brochures, and Reports
The Federal Reserve Reserve Requirements. Published by
the Board of Governors of the Federal Reserve System.
(A booklet explaining the requirements of Regulation
D: what accounts must be backed by reserves; what
reports are required; what funds qualify as reserves;
and how the new requirements will be phased in)
53 pp. March 1981.
Pamphlet announcing Monetary Policy and Reserve Requirements Handbook. Issued by the Board of Governors of the Federal Reserve System. (Describes a
new looseleaf service of the Federal Reserve Board
and includes an order form) 4 pp. March 1981.

16

Federal Reserve Bank of Dallas