mr. kelley discusses the “ millennium bug ” from a public sector perspective remarks by mr. edward w. kelley, jr., a member of the board of governors of the us federal reserve system, before the professional banker ’ s association, washington, d. c. on 15 / 12 / 97. i am pleased to appear before the professional banker ’ s association to discuss the millennium bug from a public sector perspective. the millennium bug, or year 2000 problem, has the potential to seriously disrupt the infrastructure of computer systems and telecommunications that the world community depends upon for the free flow of funds and payments and hence, virtually all of everyday commerce. the year 2000 problem is a business continuity issue that requires a coordinated effort by public and private business and information technology management. although the problem itself is not technically difficult, ensuring that information systems are year 2000 compliant is a management challenge of enormous scale and complexity. while this matter will impact every organization everywhere, my talk today will focus specifically on the key areas of public sector finance and banking. the global nature of today ’ s financial services industry relies upon the interconnection of computer systems world - wide. my purpose today is to identify the serious nature of the problem and the urgent need for immediate action by the government of every nation. as it will impact every country with which you interact, i believe that you of the professional banker ’ s association are in a unique position to be a catalyst for promoting attention to the year 2000, stimulating action, and promulgating best practices in developing nations. this afternoon, after sketching out the critical nature of the problem, i will focus on plans and actions being taken by the federal reserve system to address the millennium bug in its own internal operation, as a case study of what an organization like ours must do. then on to our efforts within the u. s. financial services industry and the international financial community, and finally a few words on how you can help. the millennium bug what is this problem all about? most computer operating systems and applications in use today register dates as two digits. consequently, such computer systems, software programs, or embedded chip devices can not distinguish the year 2000 from 1900, when both dates are registered as “ 00 ”. when the clock rolls over the next millennium, computations based on two digit dates will produce errors. those relatively few systems using four digit date fields will have different problems, but they will have problems, nonetheless. while the situation can be stated simply, its scope

. a more general concern is that laws can never be fixed in perpetuity. as societies and economies evolve, the details of the law, though generally not its fundamental principles, need to change. but any uncertainty about the clarity and fixity of the law adds to the risk of trade, which as i noted, is reflected in a higher real cost of capital. we in the united states endeavored to lessen legal uncertainty by embedding our most fundamental principles in a constitution, which we made difficult to amend. the commercially and economically salient specifics are typically expressed in federal or state statutes. in general, this arrangement seems to have provided us with a healthy balance of continuity and predictability and, yet, also the requisite flexibility to respond to evolving economic and societal circumstances. * * * reflecting that flexibility, the direction and the emphasis of legislative revision over the generations have mirrored the changing structure of our economy. in recent decades, for example, the fraction of the total output of our economy that is essentially conceptual rather than physical has been rising. this trend has, of necessity, shifted the emphasis in asset valuation from physical property to intellectual property and to the legal rights inherent in intellectual property. though the shift may appear glacial, its impact on legal and economic risk is beginning to be felt. over the past half - century, the increase in the value of raw materials has accounted for only a fraction of the overall growth of u. s. gross domestic product ( gdp ). the rest of that growth reflects the embodiment of ideas in products and services that consumers value. this shift of emphasis from physical materials to ideas as the core of value creation appears to have accelerated in recent decades. technological advance is continually altering the shape and nature of our economic processes and, in particular, is promoting the trend toward increasing conceptualization of u. s. gdp. the size of our radios, for example, has been dramatically reduced by the substitution of transistors for vacuum tubes. thin fiber optic cable has replaced huge tonnages of copper wire. new architectural, engineering, and materials technologies have enabled the construction of buildings enclosing the same space with far less physical material than was required, say, 50 or 100 years ago. more recently, mobile phones have markedly downsized as they have improved. the movement over the decades toward production of services requiring little physical input has also been a major contributor to the marked rise in the ratio of constant dollars of gdp to ton of input.