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Atlanta Chapter, NABAC
Atlanta, Georgia

Challenge and central banking go hand in hand.

We at the Atlanta

Federal Reserve Bank believe that the Federal Reserve System--our central
bank--is constantly facing and successfully meeting new challenges.
purely technical level

On the

we are today faced with the possibility of operating

in a checkless and cashless society.

In matters of monetary policy we are

confronted with the problem of bridging gaps between the changing financial
world and ever changing outside world.
What is money?

Long ago, it was coins and currency.

But today, a wide

variety of credit instruments perform the essential functions of money.
by day, the substance of money is becoming less and less palpable.


More often

than not, transactions are carried out with no actual movement of legal tender.
Payment is made and received by bookkeeping entries at banks.

In recent

years the introduction of high-speed sorters and computers has accelerated
this process enormously.
The computer has brought automation to the bank.
bank transactions will be computerized eventually.

Some believe that all

Each customer will then

have a new kind of telephone with a special credit-card unit.

Instead of

paying by check or money, one will insert his credit card into the telephone
and his account and that of the seller will be appropriately debited and
credited by their respective banks.

Accounts will be balanced almost instanta­

neously .
If banks do not assume leadership in this credit revolution, other
institutions will.
the field.

Retail outlets and credit companies are already deep into

Some foresee the day when each business may install an electronic

system linking it with other businesses through a central exchange.

Then, each


business can make instantaneous credit checks and offer its customers the
convenience of universal credit cards.

Currency, checks, cash registers, and

sales slips can be almost entirely eliminated.
The credit revolution will have a tremendous effect on the banking system.
Banks may be either the greatest beneficiaries or the greatest victims of this

Banks who surrender to the revolution will be those who see

automation merely as a replacement for the man who wears the green eyeshade.
Although automation cuts the cost of doing routine work and increases the
volume of work which can be accomplished, its effects are purely mechanical.
The beneficiaries of automation will be those who recognize it as the greatest
upheaval since banking's inception 500 years ago.
The mechanical side of the computer revolution has already made radical
changes in banking.

Checks are now sorted by magnetic ink characters.


volume of checks thought beyond the capacity of the banking system a few years
ago is routine today.

Handling costs per transaction have been slashed.


greater changes are yet to come.
In the future a customer may visit his bank no more often than the telephone

Check sorting and re-sorting, shipment of checks from bank-to-bank or

bank-to-customer, storage requirements for checks, kited checks, endorsements,
and float will be antiquated.

Manual processing will be minimal.

Banks may

handle payrolls, bill and process many types of contracted payments for insurance,
rent, and mortgage.

Necessary coin and currency will be supplied from commercial

establishments regularly serviced by money truck pickup and delivery.
Automation has already begun at the Atlanta Federal Reserve Bank. The
Bank and its branches have instailed/computer systems. Realizing that we had
been doing largely man's work with our computers, we are now studying how we


can tailor our work to the computer.

In other words, we are trying to use

the computer as a machine rather than an extremely fast man.

We are sharing

what we have learned about bank automation with our member banks by offering
two programs to aid them in reducing costs and providing better service.
In our Functional Cost Analysis service we give member banks comparative
earning and cost figures for a group of banks of similar size and deposit

In this way a bank can compare its efficiency with that of similar

By determining the relative profitability of various bank functions,

management will know where to concentrate its efforts.

The second program

involves the assistance of the Federal Reserve Bank in finding the various
automation alternatives available and the provision of tools whereby the
commercial bank can make an enlightened evaluation of these alternatives.
We are only scratching the surface, however, and need to glean as much
information as possible from others who are experimenting in the field.


understand that a bank in New York is now doing bookkeeping and billing for
a local doctor through teletransmission.

The use of microwaves of similar

techniques holds promise for expanding such services to large parts of the

Of course, no one knows how many of today's dreams will become reality

tomorrow, but we must be prepared to cope with whatever comes to pass.
At the same time that we are adapting to technological change, we must
foster economic growth and a stable dollar.

We must act in our most important

role--that of a governor on the nation's "economic engine."

Like the

mechanical governor, our job, quite often, is to prevent the engine from
going too fast and overheating.

At other times, we must prevent it from

going too slowly by controlling its fuel of money and credit.
Both the capacity and the structure of our economy are constantly changing.

- 4 -

And so, just as the System's operations must be altered in the face of a
technological revolution in banking, we must alter the flow of money and credit
when economic conditions change.

If the Federal Reserve allowed the supply of

money and credit to increase less rapidly than the nation's output of goods and
services, we could well be accused of contributing to economic recession.


the other hand, we all know that in many situations a greater rise in the
supply of money and credit than in goods and services helps fuels of inflation.
Much depends on whether or not the economy is running close to capacity.
A few years ago new money and credit helped put idle men and machines to work.
Today we have very little unemployment, and industry is operating at near full

In this situation too much credit could result in higher prices and

perhaps runaway


Furthermore, interest rates were rising well before

the Federal Reserve started to dampen the growth of commercial bank reserves,
which determine the amount of money and credit in the banking system.
At no time has the Federal Reserve reduced the quantity of available funds
for loans.

Total reserves held by the banking system are still increasing,

although at a growth rate insufficient to meet all demands imposed on commercial

The Federal Reserve's actions indeed have been quite modest and

thoroughly defensible.

The only alternative would have been to expand reserves

rapidly enough so the rise in supply of money and credit would have matched the
increase in demand.

But, since the economy was very near full capacity, this

would only have raised prices even further.

It would not have increased employ­

ment or output significantly, but would have led to uncontrollable inflation.
There are several reasons for the increase in demand for funds.


expenditures are larger than ever before because of the war in Viet Nam and
new domestic programs.

Spurred by a boom in profits and a backlog of unfilled

- 5 -

orders, investment spending by business is growing at a phenomenal rate.
Local government spending is rising rapidly--much faster than is Federal

Rising personal incomes have brought increased consumer spending.

The impact of this spending is seen in various economic indicators.
Manufacturing plants are operating near capacity.
several years of relative stability.

Prices are rising after

The consumer price index, which had

been increasing at an annual rate of around 1 percent, has doubled its rate
of gain.

And, as I have already indicated, interest rates--at levels un­

matched since before the Depression of the 30's--have seldom been higher.
The pressure behind this rise was excessive demand for funds.

If, by increas­

ing the supply of money and credit more rapidly, the Federal Reserve had
satisfied demand, the lid most surely would have blown off under the pressure
of even higher prices. fpThere are no "winners" during an inflation.


lose because they are repaid with dollars worth less than those they lent.
Savers lose because the dollars they withdraw are worth less than those they

Consumers lose because prices rise.

Businessmen find costs higher,

planning more difficult, and risk increased due to the greater uncertainty of
future conditions.

Many of the nation's resources are funneled into wasteful

uses, as prices and profits rise on some goods because of scarcity rather than
an increase in value.

The rise in our price level makes our goods less

competitive in the world market and foreign goods more competitive in the U.S.

The point is clear.

We need a stable dollar, not only domestically

but for the balance of payments as well.
How does this figure in the current monetary situation?
how do we maintain balance in today's financial markets?

More specifically,

For over a year,

credit demands have increased much faster than the supply of lendable funds.




This great increase in demand for funds has pushed interest rates up.


has become an expensive commodity.
When people today say money is tight, they really mean that credit has
become high-priced.

If you are willing to pay for it, credit is available.

In the present situation tight money is really a "misnomer."

"Tight" implies

less money, and we do not have less money today, only more expensive money.
Money has become more expensive not because the Federal Reserve System
has reduced its supply but because it has not increased the supply of money
by as much as the economy demanded.

Interest rates were rising in response

to a significantly faster increase in demand than in supply well before the
Federal Reserve increased the discount rate.
Is monetary policy the only way to contain inflation?



have long realized that fiscal and monetary policies can be used together to
promote balanced economic growth.
for goods and services.

Both operate by affecting aggregate demand

A tax increase will dampen growth in demand just as

will a reining in on money and credit by the Federal Reserve System.


monetary policy, fiscal policy, once on the books, takes effect quickly.
also acts more directly.


Since monetary policy operates through the market,

it cannot, like fiscal policy, take into account particular cases where there
may be inequities and hardships.

Such inequities develop when excessive demand

is curbed by monetary policy alone because its impact is limited to those
sectors of the economy which are sensitive to changes in interest rates.
We in the Federal Reserve System would welcome some fiscal aid in seeking
to achieve our objectives of a sound and growing economy.

Until such help

arrives, we must rely on monetary policy, our only tool.

With it we hope to

limit credit expansion to a level compatible with real economic growth.



course, the Federal Reserve has no intention of carrying out this policy to
such an extreme that it brings on a recession or a depression.

The System

hopes it can steer the economy back onto the path of sustainable growth.
This is the goal of the Federal Reserve System.
through boom and recession:

Our role remains the same

We must help preserve the integrity of our

monetary system in the public interest.

The manner in which the System

performs this role, however, must change as the economy changes.


flexibility and independent judgment, we at the Federal Reserve Banks
believe we can beneficially influence our nation's economic life.