THE 20th CENTURY HAS BEEN CALLED THE "AMERICAN CENTURY." It was a century in which the standard of living of the average American increased six-fold. Economic booms lasted for decades--the 1920s, the 1950s and the 1960s all saw rapid economic growth and rising standard of living. But then our economy's engine began to sputter. From the early 1970s to the mid-1990s, the average growth rate of our economy slowed to about two-thirds of its average pace from the 1920s to 1970. Starting about 1995, however, the U.S. economy began to expand rapidly, and unemployment and inflation fell to low levels not seen since the 1960s. Although the pace of economic activity slowed during the second half of 2000, many economists remain convinced that the economy's growth potential remains high.

This year's annual report is concerned with economic growth. Over long periods, the principal determinant of how fast our economy can grow--that is, how fast our standard of living can increase--is the growth of labor productivity. Since the mid-1990s, the United States has witnessed a remarkable increase in the growth of labor productivity, exceeding that of all other G-7 countries. In this report, we look to history for information about how such surges in productivity come about, how long they can last, and whether economic policy can do anything to boost our economy's potential to grow.

Previous centuries' productivity booms were associated with fundamental technological breakthroughs and their widespread commercial application. Industrial revolutions of the 18th and 19th centuries were jump-started by the invention of new general-purpose technologies, such as the steam engine and the electric motor, which had wide application throughout the economy.

The breakthrough invention of modern times is the microchip. Because it too is a general-purpose technology, many observers believe that the broad application of information and communications technology throughout the economy will spur a sustained increase in productivity and economic growth. But the jury is still out on whether the recent surge in productivity will prove as durable as those of the past.

Our examination of the links between technological progress and economic growth reveals how clusters of technological breakthroughs lead to sustained increases in productivity growth and standard of living. Our study shows also how government policy can affect economic growth, principally by helping ensure an economic environment that encourages inventive activity and the efficient allocation of economic resources. As a central bank, we can play a role in this effort by ensuring that the market signals of the price system are free of distortions caused by uncertainty about the general level of prices. Price stability contributes significantly to an environment in which technological progress and productivity growth are encouraged and our economy can achieve its maximum sustainable rate of growth.

I invite you to read this year's annual report. By exploring the past, we can learn about the present and, perhaps, where our so-called new economy is headed.

William Poole, President and CEO