Those of you who enjoy, if that is the word for it, the generation gap at home as well as in your bank, have recently had your eardrums assaulted by a song called "Those Were the Days." It is a nostalgic sentiment we all share as a reaction against the complexity of today. One of the more distinguished directors of a bank, one Casey Stengel, pretty well sized it up some years ago when he described the duties of a bank director. "There ain't nuthin' to it. You go into the fancy meeting room and you just sit there and never open your yap. As long as you don't say nuthin' they don't know whether you're smart or dumb. When the question of a loan comes up if it's a friend of yours you vote to give it to him and if ain't a friend you don't." This happy philosophy can be filed under tab of nostalgia.

Like yourselves, every year-end we look back at the good old days and try to assess where we are today and lay plans for tomorrow. The London "Economist" does the same thing every year, and in December it began its lead editorial this way: "It is a good many Christmases since we have been able to look back on a year like the one that is now drawing to a close. It is not just that a lot of things have happened in 1968, though a year that began with the communist offensive in Vietnam and went on to include...the election of Mr. Nixon before it finished with a slap-up financial crisis, has a good claim to be regarded as one damned thing after another. The important thing about 1968 is that it was a year in which, at last, the answers began to come in." This was very much like the story of Citibank in 1968. It was a year of one damned thing after another, and it was a year in which perhaps some of the answers began to come in. I say perhaps because on our way to the answers, we also made our share of mistakes.

Since our problems are to some extent variations of your problems, it has always been our custom at this forum to let down whatever hair is left and share with you some of our successes and some of our failures. The big issues of 1968 were the same as the big issues of most other years: How better to adjust to our environment for the benefit of our shareholders and our customers? Here in the Citibank, that involved tearing up a lot of old habits of doing business and working our way through problems without the benefit of what Jimmy Ling once described as "depression induced brain damage."

Howard Laeri during his tenure as President of the ABA used every podium to probe the business of banking, and what we can do to defend ourselves from non-bank competitors who would rather sue us than compete.

Like yourselves, we grappled with this problem. It was a problem we talked about at this forum last year, and in the interim our competition has gotten toughter and not easier. We took our Policy Committee far away from this city for three days last Spring to struggle with the problem, and in the end reduced our possible couses of action to four options:

1) Ignore it. This we rejected on the ground it would put banking at the wrong end of a statistical curve.

2) We could work toward favorable legistlation, which we have been doing but with indifferent success.

3) Continue to fight our competitors in the courts, which is expensive, time-consuming, and the results are uncertain.

4) Change our corporate structure into a one-bank holding company and meet the competition on even ground.

As you know, we chose the last option while continuing to work on two and three. We think it is right for us, but that doesn't mean we think it is right for everybody. Our philosophy is that we want to stay in the money business. We have no desire to diversity into building a cement plant or developing a new pill. We have no appetite to become a conglomerate like Litton, LTY or Gulf and Western. We feel when a bank management reaches out in non-financial fields too far, it will lose its competitive sharpness in banking and risk management failure in unknown fields. The marketplace always takes care of incompetence.

The holding company conept has spread throughout the land, almost too rapidly. Banks that have formed or have announced their intention to form one-bank holding companies now account for more than 20% of total commerical bank deposits.

Like all movement, this action has generated heat. The Cassandras will tell you that we are going back to the dreadful days of the 1930's. This should not surprise us or discourage us. Controversy has always been the handmaiden of change. The only justification for change has rested in the end on whether the public interest is served. The development of the modern supermarket demonstrates that the public likes one-stop shopping at a compettitve price. One case for the banking business will be won or lost in the years ahead depending on how effective we have been in mending our political fences as an industry. Our future on the legislative and regulative fronts ultimately depends on whether or not our customers are demanding and getting from all of us in this room the kind of financial service that they require.

Concurrently with the structural problem, we have been worrying about our internal organization, and we talked to you about that last year too. How do we organize our bank to respond constructively to the needs of our markets and make a profit for the shareholder? We have done a lot of work on this, come to some conclusions, but the jury is still out as to whether or not we have gone down the right road. Only our customers can answer that question but we think we are pointed in the right direction. It all started with the thought that banks should be more market-oriented, and with the fact that our corporate structure was basically unchanged for more than forty years. We had to inquire whether we were properly oriented in a world of jet airplanes, computer utilities and communication satellites, none of which existed when our present organization structure was firmed up. The bank was getting too big, the world was getting too complicated, and our customers were getting too sophisticated to make believe that one man, or three, or four, or five knew the answers to our marketing problems. The message was clear. Our managment style had to change, we had to modernize, and the result Ed Palmer described to you briefly of a new banks with new missions, new goals, new ways of doing busines, new responsiblities, but with the same old cautions which are bred into the bones of a good banker. Somehow we got there. It took an incredible amount of research, discussion, planning, proving and revising, and over a hundred officers of this bank were involved, helped, to be sure, by a consultant, but a home-grown product nevertheless.

Decision-making has been further decentralized in the new group organization. The old functional/geographic organization made really dectentralized management and the measure of preformance terribly difficult. The new supervisors will of necessity have to be account managers concerned not only with the transaction but answering the question of where are we going and why are we going there.

We found a dearth of real supervisors. A lot of the department heads were put in place through the power of survival, and how to handle absenteeism, standard hours of standard costs, or even the basic leadership role. This is still our probelm although we mounted massive training programs to attempt to catch up. The concept of account management is new to many, and we found we were hindered at every turn by lack of information which was reliable, credible and on time.

I wish I could tell you we have solved the management information problem. We haven't. I think we are gaining on it. In the pressurized environment of moving from a NCR barrel machine to a 360 40, from a ledger card to a data cell, we may have shortchanged the total systems concept. The day when you can press a button at a remote terminal and get all the information about the way an individual customer does business with the bank has not yet arrived at our bank. The central data base is hard to build, it is expensive, it is frustrating, but in the end may become essential. We have come a long way in '68 with our MIS system, particularly in the standard costing and standard hours area. We have come a long way toward a reliable account profitability system. We have come a long way on a transfer pricing system and a realistic allocation of capital, and we have come a long way on market information, but we are not there.

The mission of an effective MIS system is to translate institutional goals into action at all levels, report performance and to provide timely information on which good decisions can be made. I don't think we will ever get to a mechanical system that accurately measures individual performance. While the MIS is the heart of a profit-center operation, it is still only one description of a person. The way he plans his work, the way he organizes his job, the way he develops himself and, very importantly, brings along the people who report to him, all of these are parameters of individual performance.

We did a lot in 1968 and we had a lot of problems, part of which were generated by trying to do two things at once. The world in general had its problems, some of which are reflected in our balance sheets. We found that while the astronauts could circle the moon and land on a pinpoint, nobody seemed to be that good at fine-tuning our economy or predicting the liquidity squeeze.

We found that decentralization without control could be a disaster. We found that functional budgets are necessary in some areas, lest you wake up with skyrocketing costs as each group builds its own empire.

The Research and Development budget still haunts us. We tried to get a handle on it by dividing R&D into two sections, one pure research and development on the management sciences and, two, systems operation and reaserch on a cost-effective basis with a demonstrated payout. The user involvement has not been what we hoped. It has gotten a lot better, but there is a long way still to go.

Many of us are using third generation computers with second generation programming which is expensive and, in the end, a waste of the hardware. One of the problems we have to look at is how do we evolve a program to take us from the melange of dedicated systems currently up and running to the world of multi-processing integrated systems of tomorrow. This is no small problem and we don't have the answers. Part and parcel of the whole problem is some realistic way to appraise the cost effectiveness of the activities we are now engaged in and how we are to get a handle on that.

This problem was highlighted by a recent survey of more than 2500 executives sponsored by the Diebold Research Program. The survey showed that technicians and not management are setting goals for computers. In a sense this is part of the generation gap but, as Diebold points out, is one of the prime reasons why we often fail to realize the true potential from our data processing investment.

The ultimate problem for you and for us is, of course, people. How to attract them. How to hold them. How to motivate them. Here in our bank we have attacked this vigorously at many levels, running from our program of training the hard-core unemployed to seminars for senior officers. No one has to remind you that the unprecedented prosperity in Wall Street is a powerful magnet pulling at our best people. More than fifteen years ago, Eric Hoffer, the stevedore philosopher, wrote "Discontent is likely to be highest when misery is bearable; when conditions have so improved that an ideal state seems almost within reach." He was talking about political rebellion. The same point is valid in our bank. Never has compenstation been so good nor the worry about it more intense. The stock option has been a good lever on motivation, but recently laws have drained away some of its attraction. One of our problems is that most people in our bank have no idea of the value of the compensation pacakage, and last year we sent every employee at home a computer print-out, attractively packaged, which showed the value of all the various fringe benefits, and another for 1968 will be in the mail shortly. We are working on additional ways for key people to participate in a scheme to build up their equity capital, and hopefully making some progress.

The problems that will plague us tomorrow are legion, but one of them I commend to your thought is the so-called third banking system. I refer to the fact that the amount of commercial paper outstanding today exceeds the amount of CD's held by all American banks. The handwriting is on the wall that the finance companies you and I helped put together for our commerical customers are now bypassing the commercial banking system at an increasing rate. The traditional sellers of commercial paper have been joined by such unlikely prospects as the Union Pacific Railroad, General Electric Company, and hundreds of commerical firms. We commerical banks hold the umbrella of unused lines-- at no fee-- to permit our customers to borrow money at below our best lending rate. When the problem was minimal and the numbers were small, we could all hope it would go away. It doesn't appear to be responsive to our desires, and our industry in '69 will have to think about how we can respond to this growing challenge. In addition to our profit and loss, it can affect our liquidity, it can affect our ability to respond to our customer's total financial needs, and it can even affect the soundness of the country's financial structure.

In a sense, the world has turned over and the banks are the mirror image of what they used to be. The great bulk of our loans were once in short-term seasonal paper, and we left the longer maturities to be solved by the investment banker. Today our term loans exceed our short-term loans, and the commerical paper market is taking over our traditional bread and butter business. The use of acceptance has declined, partly because of our inaction, but also because the regulations issued by the Federal Reserve were fashioned for another era. The acceptance, which is the oldest banking instrument known, may yet have some life in it if used imaginatively. The growth of the third market is steady and, while it may not have impinged upon your particular morning, it has loomed ever larger on our horizon. We could meet the problem the way that great pitcher Satchel Page met the problem of old age; he said "I never look over my shoulder; it might be gaining on me." I suggest we all better look over our shoulders.