Enrico Fermi was the leading scientist on the Manhattan Project, which led to the use of nuclear energy for both war and peace. Years after the project's completion, he returned to the University of Chicago campus where the work had been done and lectured to the students.

At the end of the lecture, one student asked what the great man was working on.

He answered, "Nothing."

The student was aghast. How could one of the most important scientists of the century deny mankind the fruit of his research? It seemed almost criminal for such a thinker to quit working.

Fermi answered, "There is nothing more I can do. I was trained in pre-Fermi physics."

The implication was clear. Even as great a man as Fermi is limited by the way his mind is trained. It is enough that he should make one fundamental change in the way people think. It becomes the responsibility of other, younger scientists to assimilate Fermi's work and move on to greater accomplishments.

For bankers, the lesson is the same. We have been trained under a system that is heavily regulated and controlled. We are accustomed only to doing a limited number of functions.

Yet, the world continued to move forward. And if we don't keep pace with it, if we are limited by our training, then some day someone will ask, "What are the bankers doing?" And the answer will be "Nothing."

We are prisoners of tradition.

The extent to which this is true was illustrated by a letter that arrived recently at Citibank's economics department, in response to an offer for one of the bank's publications.

"While I'm sure it would be excellent," the writer said, "I cannot subscribe because you are for interstate banking."

The letter went on, "I am the president of two small Midwestern banks, and think that the present system is working very smoothly."

The present system could be said to be working very smoothly, I suppose. Last year, commercial banks increased their deposits at a very smooth 8.3% rate, down from the previous year's very smooth 10.7% rate. Of course, the inflation rate was even smoother.

The nation's thrift deposits, meanwhile, were declining very smoothly, from $490 billion in 1978 to $380 billion last year.

Money market funds, on the other hand, were increasing their assets at an exponential rate, more than 50% this year alone. Merrill Lynch alone has more in their funds than the domestic deposits of Citibank. No wonder they're bullish on America.

Their cash management account, which is nothing more than personal banking for the most affluent customers of commercial banks, has added 110,000 customers bringing the total to 300,000.

There are other very smooth developments. The nation's largest insurance company was adding another boulder to the Rock of Gibraltar for --- the sixth largest brokerage house on Wall Street. And the world's largest integrated network of financial services, including commercial banking overseas, was leaving home with the fourth largest Wall Street firm.

The trend is clear. The market is demanding a greater variety of financial services, but they want them provided at even greater convenience.

Many years ago, an enterprising entrepreneur figured out that people who lived in rural areas would probably like to shop for a greater selection of goods than was available at the local general store but couldn't afford to travel to the big city. Thus, the mail order business was born. And today one of the pioneering companies in that field is one of the dynamic forces in the field of financial services.

They provide insurance and consumer credit and even banking, which now earn more than their retail sales.

The same sort of convenience that Sears afforded to its customers through the mail - is now available through the mail, the toll free telephone, and even through cable television. They are providing banking and other financial services instantly. People want one stop financial services, and it won't be very long before they will eliminate even that stop, if they can.

This is what the market demands, and this is what technology permits. And if banks don't provide this convenient service, someone else will.

Unfortunately for banks, however, we are not permitted to do so. Alone among financial service institutions, we are restricted from making use of what the market demands and what electronics permit. We are caught in a web of banking laws at both the state and federal level which dictate the terms under which we can do business, when, and with whom.

At the very simplest level, banks take deposits from some customers and then lend them to others. As long as savers have nowhere else to go with their spare cash, they will put it in the local brick and mortar institution. And as long as borrowers have nowhere else to go except to their local bank, that is where they will go for credit. That is how the world ran 25 years ago. If our friend in the Midwest is to be believed, that is still how the world runs in some places.

But a number of factors have put an end to that convenient and profitable vision of the world.

Inflation. The dollar is shrinking. The certainty that a dollar in the bank will be worth less tomorrow compels people to spend it today. We have gone from a nation of frugal, rainy-day conscious savers to a society built on consumption and credit.

People are no longer content to allow their dollars to languish in accounts paying 5¼%, or in interest free checking accounts, when they can get the market rate of interest in other saving instruments.

Banks are forced to compete with many other kinds of institutions for their deposit bases. This has made cheap money a thing of the past.

A higher cost of funds has driven up the cost of credit, as well. With the cost of funds at 13% or 14% banks are a little reluctant to offer loans at 12% interest. And even if they want to, they can't afford to keep it up. In states which attempt to reverse this immutable law of economics, through usury ceilings, people find that credit is no longer available.

This inflation has changed the way we do business in this country, from one end to the other. It has forced us to reassess our costs and to look for economies wherever they can be found.

The average driver, for example, is keeping his speed down at 55 miles per hour, not because of lower speed limits, but because gasoline is so expensive. Manufacturers, too, are looking for savings in energy and raw materials. Some commodities costs have, in fact, come down. It used to take millions of dollars of copper wire, for example, to run communications lines across continents and oceans. Now, however, one satellite can do the work of those same copper wires, and the demand for copper has slackened.

So, too, is inflation affecting our business, and we are looking for economies of our own. It affects both our cost of funds and delivery of funds profoundly.

One of the few areas where financial services can keep up with inflation is in the cost of delivering services.

Our traditional markets, taking deposits and lending them, are crowded as never before by competitors who can provide the same services at lower cost.

The cost of collecting funds through the mail or by telephone is so low, for example, that a money market fund can profit by investing at a margin of only 50 basis points above the cost of funds.

A bank, with its brick and mortar overhead, needs 300 or more basis points to make a profit.

Bank customers are getting wise to the imbalances. An industrial borrower can avoid having to subsidize bank overhead by using the commercial paper market. Or it can take competitive bids from other banks, both domestic and foreign. Or it can insist that loans be booked through a foreign branch at the London Interbank Offered Rate, rather than at that nebulous value, the prime interest rate, or base rate.

It has reached the point where banks make very little money on their traditional industrial loan business, the spreads are so low. Instead, they must earn their profits on fees and other forms of total financial service.

At Citibank, for those of you who have not studied our first quarter earnings, the figures for "other income" are now up to 43% of our total, And it is likely to remain that way as long as the nation's economy is in the doldrums.

This fee income is derived from many sources. Since our lending business brings such a low return, we try to compensate by performing as many other services as we can. Lending, then, is part of a package deal, part of a total relationship.

In consumer banking, too, there is a movement towards relationship banking. Simply put, the customer who has more money on deposit in a variety of accounts will pay less for the bank's services than someone with less money.

For example, someone who has purchased a certificate of deposit at a market interest rate might qualify for an interest-bearing, free checking account, as well. Thus, they not only earn money on all their deposits, but the bank can afford to provide other services at a loss and still make a profit.

A small depositor, on the other hand, will earn lower interest on savings and be forced to pay for each transaction through his demand deposit account.

Even when the economy achieves a substantial rate of growth at an inflation closer to what we considered normal - what seems like a hundred years ago - the lessons taught by inflation will stay learned.

After all, even as the price of gasoline has come down recently, the demand for gas guzzling cars has not risen. No one wants to he caught short in the next oil crunch. And in any case, the money you do not spend on gas can be spent on other things; other things which do not get burned up as you use them.

Similarly, corporate treasuries are now doing more banking through computers. Cash management equipment enables them to borrow, lend and sell through electronic funds transfer, working simultaneously in many currencies for operations worldwide. Why should they then return to banks?

Why indeed? Unless, of course, the banks can offer them superior service.

And that is where we return to the issue of regulation.

Regulation does not prevent people from wanting better service or new products. They want them and they deserve them. Everyone, from top to bottom in the economic scale, is entitled to the best.

Regulation only prevents some very capable institutions, ourselves, included, from providing these services.

The present regulatory structure was contrived to protect against abuse of an era that is long past.

You might say that we have Model T regulations in a space shuttle financial environment. Yet, these regulations continue to garner some popular support ostensible as protection against poor banking practice. Instead, they serve to protect their various constituencies against competition.

But because there is money to be made in financial services, these regulations have spawned a sort of shadow banking system, comprised of other financial institutions providing banking services, but which have the good sense to avoid the label of banking.

The Washington Post called these institutions "quasibanks" recently. These shadow banks are free to use and abuse, and yet they continue to grow in strength. Their success indicates that the sorts of fears people harbor about bank failure do not have much relevance in the total banking picture. People know a good deal when they see one.

Another rationale for continuing to restrict the growth of banks is fear of undue concentration of economic power. If money center banks are free to expand nationwide, they will crush local banks with their sheer size.

And yet, no scenario could be further from reality.

Since Citibank has been allowed to branch throughout the state, we have only been able to capture 4% of upstate deposits - hardly the record of an unstoppable juggernaut.

In California, where state-wide branching is a tradition, there are more than 275 banks operating, many of them very small, despite the omnipresence of Bank of America and the like.

The fact is that there is no substitute for the well-run local bank, with the emphasis on the words well-run.

There are no economies of scale yet devised that allow large banks to undercut smaller ones on most services. In fact, Citibank's, overhead on credit card processing is higher than other banks. We must charge higher fees in order to cover our costs.

There will always be an Anderson National Bank of Anderson, Indiana, willing to offer Citibank Visa card holders five bucks to turn it in and replace it with one of their own.

That is what competition means. It is freedom to fail as well as to succeed. All we want is the chance to try it. Improved productivity and pricing for profitability certainly seems to be on the right track.