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The emphasis on efficiency and technology during the Kimbrel years was prophetic. Economic and political forces were gathering that would test the mettle of the Fed in new ways during the 1980s, and these challenges would require the Bank to bring all the experience of the previous decade to bear on unprecedented conditions. The aftershocks of the 1979 round of price hikes by petroleum-producing countries were felt in accelerating inflation. Financial institutions, reeling from the interest-rate roller coaster ride of the 1970s, cried out for relief from the interest-rate ceilings that blocked them from competing with nonbank institutions for depositors' funds. Many banks talked of leaving the System in order to avoid reserve requirements, which, because they did not pay interest, were deemed increasingly burdensome.

Congress responded to the situation by passing the Depository Institutions Deregulation and Monetary Control Act of 1980 (MCA). This act phased out interest-rate ceilings on consumer deposits and made reserve requirements mandatory for all depository institutions. MCA also stipulated that the Fed would provide services like check clearing and electronic funds transfers for all depository institutions and charge fees for these services, which once had been provided free to member banks. Thus, Federal Reserve Banks found themselves in a new ball game.

Kimbrel's sudden announcement that he would take early retirement in March 1980 further marked that year as a watershed. He was succeeded by two presidents who oversaw a substantial reshaping of all three of the Bank's businesses—financial services, supervision and regulation, and research—to bring them into line with the post-MCA world and an economy that was becoming more complex and increasingly global.

Muscular approach to pricing
Kimbrel's decision to retire sparked speculation and threw open a leadership question that Kimbrel himself had not foreseen. Fossum had retired in 1979, only 10 months before Kimbrel's announcement, and the new first vice president was Robert P. Forrestal, whom Kimbrel had recruited from the Board of Governors staff in 1969 to be the Atlanta Bank's general counsel. Forrestal was regarded as bright, competent, and reassuring. His background was in neither operations nor economics, however, and he had been first vice president just 10 months. Still, Kimbrel was confident his advice would be followed when he recommended that Forrestal succeed him. As it turned out, Kimbrel was right in foreseeing Forrestal at the Bank's helm, but his timing was off by a few years.

William F. Ford served as Bank president from 1980 to 1983.

Instead, the first of the 1980s leaders was William F. Ford, a University of Michigan Ph.D. who was resident economist and head of the planning department at Wells Fargo Bank in San Francisco. One of the qualities that made Ford attractive to board chairman William A. Fickling, who directed the search for Kimbrel's successor, was his reputation as an opponent of inflation at a time when the System, under the leadership of Paul Volcker, was fighting a determined battle against ingrained inflation and some of the political forces that created it. Aside from taking up the cudgel against inflation, it was to be Ford's job to bring the Bank into the era of priced services required by MCA, and to this task he brought an entrepreneurial, competitive spirit, which he applied not only to pricing the Bank's services but also to marketing them.

MCA "unbundled" the package that had combined membership, reserves, and services, and the System faced a monumental task of calculating its costs and assigning prices to its services. The legislation threw the Fed into direct competition with large commercial banks and other providers of many of those services. No longer would there be a captive market for free Fed services. Every buyer could pick the provider that did the best job at the best price. Commercial banks argued successfully that Federal Reserve Banks should add a private-sector adjustment factor to compensate for the Reserve Banks' nonprofit advantage.

The advent of explicit charges for once-free check clearing inevitably meant that some business would move to local clearinghouses to be exchanged outside the Fed. Clearing volumes at Reserve Banks were virtually certain to drop. If declining volumes forced Reserve Banks to raise prices to recover costs, there would follow what one consultant hired by the Atlanta Fed called "a self-reinforcing downward spiral in Fed check volumes." Since check processing services were expected to bring in 89 percent of the Sixth District's revenue from priced services, serious losses in that area, if repeated in all Districts, could threaten the Fed's role as operator of the nation's payment system. Throughout the System, Reserve Banks braced for the losses that began even before prices went into effect in August 1981. In the first five months of pricing, check clearing volume in the Atlanta Bank and its branches dropped from 8.4 million items a day to 7.3 million. The decline continued over the first three quarters of 1982, then bottomed out and began to climb again. By the end of 1982, it was back to 7.8 million.

The Atlanta Bank was prepared for the drop and responded with staff and equipment cuts that decreased personnel in check processing by 20 percent. As a result of belt tightening in Atlanta, costs in the area of priced services increased only 4.7 percent during the first year of pricing. That was a strong, System-leading performance. For 1982, the first full year of priced services, the Bank showed an "overrecovery" of costs plus the private system adjustment factor of $284,133, or 0.7 percent. Revenue from priced services in Atlanta had actually come out ahead of costs. Overrecoveries in first quarter 1983 were $997,913, or 9.97 percent. Thus, prices in the Sixth District would have to be cut to reduce overrecovey. The Bank was passing its first market test with flying colors. Check-clearing volume was climbing again throughout the System. Through May 1984, aggregate System revenues were running a reassuring 103 percent of costs plus the private sector adjustment factor. In the Sixth District, the number was 135 percent.

The quick success of the Atlanta Bank, followed by other Reserve Banks, in staving off large losses in check processing was reassuring to the System, but the Board of Governors would have settled for less. Atlanta Chairman John Weitnauer sensed the situation perfectly. ". . . [T]he board of Governors is sensitive to priced services. It has received much flak from bankers," the minutes for February 1984 record him as reporting. "The goal is to break even on costs and not cause too many ripples in the marketplace. At the same time, we have a competitive group of people at the Bank that want to do the best they can."