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ACTIVITIES AND POLICIES OF DISTRICT BANKS
AND THEIR IMPLICATIONS FOR MONETARY POLICY
HEARING
BEFORE THE
SUBCOMMITTEE ON
DOMESTIC MONETAEY POLICY
OF THE
COMMITTEE ON
BANKING, FINANCE AND URBAN AFFAIRS
HOUSE OF REPRESENTATIVES
NINETY-SEVENTH CONGRESS
SECOND SESSION
SEPTEMBER 23, 1982
Serial No. 97-??
Printed for the use of the
Committee on Banking, Finance and Urban Affairs
U.S. GOVERNMENT PRINTING OFFICE
99-756 O
WASHINGTON : 1982
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
FERNAND J. ST GERMAIN, Rhode Island, Chairman
J. WILLIAM STANTON, Ohio
HENRY S. REUSS, Wisconsin
HENRY B. GONZALEZ, Texas
CHALMERS P. WYLIE, Ohio
JOSEPH G. MINISH, New Jersey
STEWART B. McKINNEY, Connecticut
FRANK ANNUNZIO, Illinois
GEORGE HANSEN, Idaho
PARREN J. MITCHELL, Maryland
JIM LEACH, Iowa
WALTER E. FAUNTROY, District of
THOMAS B. EVANS, JR., Delaware
RON PAUL, Texas
Columbia
ED BETHUNE, Arkansas
STEPHEN L. NEAL, North Carolina
NORMAN D. SHUMWAY, California
JERRY M. PATTERSON, California
JAMES J. BLANCHARD, Michigan
STAN PARRIS, Virginia
CARROLL HUBBARD, JR., Kentucky
ED WEBER, Ohio
JOHN J. LAFALCE, New York
BILL McCOLLUM, Florida
DAVID W. EVANS, Indiana
GREGORY W. CARMAN, New York
NORMAN E. D'AMOURS, New Hampshire
GEORGE C. WORTLEY, New York
STANLEY N. LUNDINE, New York
MARGE ROUKEMA, New Jersey
MARY ROSE OAKAR, Ohio
BILL LOWERY, California
JIM MATTOX, Texas
JAMES K. COYNE, Pennsylvania
BRUCE F. VENTO, Minnesota
DOUGLAS K. BEREUTER, Nebraska
DOUG BARNARD, JR., Georgia
DAVID DREIER, California
ROBERT GARCIA, New York
MIKE LOWRY, Washington
CHARLES E. SCHUMER, New York
BARNEY FRANK, Massachusetts
BILL PATMAN, Texas
WILLIAM J. COYNE, Pennsylvania
STENY H. HOYER, Maryland
SUBCOMMITTEE ON DOMESTIC MONETARY POLICY
WALTER E. FAUNTROY, District of Columbia, Chairman
PARREN J. MITCHELL, Maryland
GEORGE HANSEN, Idaho
STEPHEN L. NEAL, North Carolina
RON PAUL, Texas
DOUG BARNARD, JR., Georgia
BILL McCOLLUM, Florida
HENRY S. REUSS, Wisconsin
BILL LOWERY, California
JAMES J. BLANCHARD, Michigan
ED WEBER, Ohio
CARROLL HUBBARD, JR., Kentucky
JAMES K. COYNE, Pennsylvania
BILL PATMAN, Texas
HOWARD LEE, Staff Director
(II)
CONTENTS
STATEMENTS
Page
Boykin, Robert H., president, Federal Reserve Bank of Dallas, Dallas, Tex
Corrigan, E. Gerald, president, Federal Reserve Bank of Minneapolis, Minneapolis, Minn
Morris, Frank E., president, Federal Reserve Bank of Boston, Boston, Mass
Solomon, Anthony M., president, Federal Reserve Bank of New York, New
York, N.Y
85
15
18
15
ADDITIONAL MATERIAL SUBMITTED FOR INCLUSION IN THE RECORD
Boykin, Robert H., prepared statement
Corrigan, E. Gerald, prepared statement
Faun troy, Chairman Walter E.:
Copy of subcommittee notice containing questions submitted to the Federal Reserve district bank presidents
Press release of the subcommittee, dated September 7, 1982
Hansen, Hon. George, article from New York Times Magazine, September 19,
1982, "A Talk With Paul Volcker"
Joint prepared statement of the Federal Reserve bank presidents testifying,
Presidents Boykin, Corrigan, Morris, Roos, and Solomon
Morris, Frank E.:
Letter, dated October 7, 1982, containing further comments to Chairman
Fauntroy's questions contained in subcommittee notice *.
Prepared statement
Patman, Hon. Bill, article from the Washington Post, September 22, 1982,
"Wojnilower Fears Return to Tight Money Policy"
Roos, Lawrence K., prepared statement
Solomon, Anthony M.:
Letter, dated October 19, 1982, responding to the request of Congressman
Paul for additional information
Prepared statement
(in)
88
101
3
5
10
20
201
152
189
116
186
126
ACTIVITIES AND POLICIES OF DISTRICT BANKS
AND THEIR IMPLICATIONS FOR MONETARY
POLICY
THURSDAY, SEPTEMBER 23, 1982
HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON DOMESTIC MONETARY POLICY,
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS,
Washington, D.C.
The subcommittee met, pursuant to call, at 10 a.m., in room
2128, Rayburn House Office Building, Hon. Walter E. Fauntroy
(chairman of the subcommittee) presiding.
Present: Representatives Fauntroy, Neal, Barnard, Reuss,
Patman, Hansen, Paul, McCollum, Lowery, Weber, and Coyne.
Chairman FAUNTROY. The subcommittee will come to order.
Today, we are meeting to take testimony from 5 of the 12 Federal Reserve district bank presidents in what I must characterize as
a historic hearing. The Federal Reserve district banks act as intermediaries between the Board of Governors of the Federal Reserve
System in Washington and the business and financial communities
and general public in the various districts.
They are, on the one hand, entities which carry out the day-today operations of the Federal Reserve System including the
distribution of currency, processing of checks, acting as the Government's banking, supervising some of the activities of financial institutions, and extending loans to depository institutions. As the
premier financial institution in their communities, they are also
potential leaders in the affirmative action and upward mobility
programs as well as a source of significant employment and economic expertise.
On the other hand, presidents of the district banks attend meetings, and five serve on a rotating basis as voting members of the
Federal Open Market Committee which is this Nation's central
body for monetary policy decisions. They are supposed to assure
that regional economic developments and conditions are reflected
in our national monetary policy.
These hearings are intended to explore just how well the district
banks are carrying out these two different functions. We ought not
assume that just because we have had district banks for many decades, as both the operating arms of the Federal Reserve and participants in its policy process, that the system works perfectly or
that it should not be modified to better meet today's needs.
(l)
In inviting each of you to this hearing, I posed in my letter of
invitation a number of issues. Among them are the results of the
explicit pricing policy for Fed services mandated by the Monetary
Control Act and its effect on employment at the district banks, and
the impact of the expansion of reserve requirements. I also asked
about the composition of the boards of directors and possible expansion to include thrifts and other financial institutions, and the
banks' involvement in community and scholarly activities, work
training and upward mobility programs, affirmative action policies
and the numbers of minorities employed in management and research positions.
Additionally, I want to explore with you the impact on monetary
policy of regional business, financial, employment, and credit conditions, as conveyed by the district bank presidents. Finally, I would
like to examine the role that the directors of the banks have in
aiding you to formulate your ideas which are then translated into
policy by the FOMC.
Some of this discussion will obviously touch upon the most important question of the appropriateness and viability of the monetary targets presently in use and whether we might not consider
alternative targets such as credit, nominal GNP, or interest rates.
[A copy of the subcommittee notice of the hearing with the questions that were submitted to the Federal Reserve district bank
presidents and a press release of the subcommittee, dated September 7, 1982, follow:]
GEORGE HANSEN. It
RON PAUL. TEX.
•ILL MCCOLLUM. Ft
BILL. LOWERY. CAUII
ED WEBER. OHIO
JAMES K. COYNE. P.
U.S. HOUSE OF REPRESENTATIVES
SUBCOMMITTEE ON DOMESTIC MONETARY POLICY
OF THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
WASHINGTON. D.C.
20515
On Thursday, September 23, 1982, the Subcommittee on Domestic Monetary
Policy will hold hearings on the Activities and Policies of the Federal
Reserve District Banks and their Implications for Monetary Policy. These
hearings will examine a wide range of issues, including the role and
operations of the Federal Reserve District Banks in their communities and
regions and their role in determining monetary policy.
I would like you as the President of a Federal Reserve District Bank
to testify at these hearings on your two-fold role of translating national
policies into local and regional affairs, and communicating local and
regional economic concerns to the Board of Governors of the Federal Reserve
System. In regards to the first role, I hope that you will address the
following questions:
1. What are the results of the explicit pricing policy for Fed
services mandated by the Monetary Control Act? What have
been the effects on employment by the District Banks and
their branches? What difficulties, if any, have been
encountered by the expansion of Reserve Requirements? What
degree of integration and cooperation has developed between
the Reserve District Banks, the commercial banks, and the
thrifts?
2. What is the composition of your Board of Directors, the number
of women and minorities who serve on your Board, and the number
of individuals who are associated with thrift institutions?
What are your plans to expand their participation on the Board?
What is your view of proposals under consideration to increase
the number of Class "C" Directors or create a new class of
Directors who would represent the thrifts or other financial
institutions?
3. What has been your bank's involvement with community and scholarly
activities? In this connection, I would be pleased to know what
work-training programs, upward mobility programs, affirmative
action policies, forums for small and minority businesses, and
research activities your bank has been and is presently engaged
in doing.
In regard to your second role as conveyors of local and regional concerns
to the central bank, the Subcommittee is interested in the views and perceptions
of economic conditions that you, as a Reserve Bank President, bring to the
deliberations on monetary policy of the Federal Open Market Committee.
Specifically, the Subcommittee would like to know your opinions of the following
monetary issues:
1. The status of business and financial liquidity, in the economy as a
whole and in your District, and the implications for monetary policy.
2. Employment and business conditions in the economy, asawhole and in
your District, and the implications for monetary policy.
3. The relative importance of further reductions in inflation at this
time compared with the state of employment and business conditions
and liquidity.
4. The appropriateness and viability of the monetary targets currently
used by the Federal Reserve, specifically the M-l aggregate, and
your views on alternative targets, including the monetary base, a
credit target, GNP, or targetting of real or nominal interest rates.
5. The role which directors of your bank have in assisting you
formulate policy or recommendations.
The hearing will take place at 10:00 a.m. on Thursday, September 23,
1982, in the Wright Patman Hearing Room, 2128 Rayburn House Office Building.
The Subcommittee requires witnesses to provide 100 copies of their testimony
to its Members and Professional Staff 48 hours prior to the hearing. Witnesses
who wish to assure that the public and press will have adequate copies of their
statement should bring additional copies with them at the time of the hearing.
Copies may be delivered to the offices of the Subcommittee which are located
in Room H2-109, House Office Building Annex #2, Second and D Streets S.W.,
Washington, D.C. 20515. Any questions which you or your staff may have
concerning this invitation may be addressed to Howard Lee, Staff Director of
the Subcommittee, who may be reached at 202/226-7315.
Sincerely yours,
Walter E. Fauntroy
Chai rman
U.S. HOUSE OF REPRESENTATIVES
SUBCOMMITTEE ON DOMESTIC MONETARY POLICY
OF THE
COMMITTEE ON BANKING. FINANCE AND URBAN AFFAIRS
NINETY-SEVENTH CONGRESS
WASHINGTON. D.C. 20515
mews ^release
TUESDAY, SEPTEMBER 7, 1982
FOR IMMEDIATE RELEASE
contact:
Howard Lee
Andrew BartelE
202-226-7315
FAUNTROY SUBCOMMITTEE TO HEAR FROM FEDERAL RESERVE DISTRICT BANK
PRESIDENTS ON MONETARY POLICY AND BANK OPERATIONS
Hearing with District Bank Presidents is Historic First
(WASHINGTON, D.C.)
Congressman Walter E. Fauntroy (D.-D.C), Chairman o-f
the Subcommittee on Domestic Monetary Policy o-f the House Bankina Committee,
today announced that the Subcommittee would meet on Thursday, September 23,
1982, to take testimony -from selected Federal Reserve District Bank
Presidents, -five of whom sit as voting Members o-f the Federal Open Market
Committee.
The Hearings will be held at 10:00 AM in Room 2128 o-f the
Rayburn House O-f-fice Building in Washington, D.C.
Mr. Fauntroy stated that the hearings would address both how well the
District Banks a.re carrying out national policies such as -financial
institution deregulation and a-f-f irmative action, and how well the
Presidents o-f these banks are conveying economic and -financial conditions
in the districts to the monetary-policy deliberations o-f the Federal Open
Market Committee.
"This will be the -first time in modern economic history
that a group of Federal Reserve District Bank Presidents have appeared
before a House Committee or Subcommittee," the D.C. Congressman pointed
out, although individual Presidents have testified.
The twelve Federal Reserve District Banks act as intermediaries
between the Board of Governors of the Federal Reserve System in Washington,
D . C , and the business and financial communities and the general public in
the various Districts.
"On the one hand," said Chairman Fauntroy, "the
District Banks carry out the day-to-day operations of the Federal Reserve
System, including distributing currency, processing checks -from where they
are cashed to the banks upon which they are written, acting as the
Government's banker, supervising some o-f the activities of -financial
institutions, and extending loans to member banks.
The District Banks also
have a substantial impact on the communities in which they are located, as
a back—up -for -financial institutions, an employer, and a potential source
o-f economic expertise and community leadership."
"On the other hand," noted the Congressman, "the Presidents o-f the
District Banks attend the meetings, and -five serve on a rotating basis as
voting members, o-f the Federal Open Market Committee, which is the central
body -for decisions on monetary policy.
The Bank Presidents are supposed to
assure that regional economic developments and conditions are re-flected in
monetary policy."
"These Hearings," Mr. Fauntroy said, "are intended to explore how well
the District Banks are carrying out these two di-f-ferent -functions.
We
cannot assume, just because we have had District Banks -for many" decades as
both the operating arms o-f the Federal Reserve and participants in its
policy decisions, that this system is working perfectly or that it cannot
be modified to better meet today's needs."'
Among the issues before the Subcommittee at this hearing are the
results of the explicit pricing policy for Fed Services mandated by the
Monetary Control Act, its effect on individual bank employment and the
impact of the expansion of reserve requirements.
The composition of the
Board of Directors, possible expansion of the boards, retirement of the
Federal Reserve Stock, affirmative-action and upward-mobility programs of
individual banks will also be examined.
Most importantly, the Subcommittee will also explore the impact on
monetary policy of regional business, financial, employment and
credit conditions, as conveyed by the District Bank Presidents.
The
Subcommittee will also inquire of the Presidents' views on the
appropriateness and viability of the monetary targets presently in use, on
the objectives and limits of monetary policy, and on related issues.
Chairman FAUNTROY. President Morris, President Solomon,
President Roos, President Corrigan, and President Boykin, I extend
to you a deep and sincere welcome. I understand that you have a
joint statement and individual statements. Before I recognize President Solomon to present the joint statement, I would like first to
recognize our distinguished colleague, the chairman of the Joint
Economic Committee of the House, Congressman Henry Reuss.
Mr. REUSS. Thank you, Mr. Chairman.
I join you in welcoming the presidents of our Reserve banks. At
the witness table, I am delighted to see Boston, which has done
such great work among other things in regional economic development; New York, renowned in the international field; St. Louis,
whose excursions into monetary reauthorization have been welcome. Closer to my home, Minneapolis, which likewise has directed
its attention to regional economic problems of agriculture and of
high technology industry. And of course Dallas, which has given
energy some new dimensions.
It is a rare occasion to have with us the leaders of the regional
Federal Reserve banks. I have often suggested that they ought to
be heard from, by Congress, and I am delighted that today we are
going to be able to do so. And I hope that today's hearing will be
but the first in a series, for which I commend you, Mr. Chairman.
I have a couple of observations on monetary policy. First, on the
supply side, the supply of money, it is my belief that monetary
policy, particularly the Fed's plans for 3 months from now, for
1983, remain too tight. Every day evidence grows that the economy
is not recovering. The pace of growth hoped for by the administration is hopelessly out of sight. That sought in the congressional
budget resolution is not going to be achieved, and that is going to
make another mockery of the budget process.
Yesterday we got some more bad news. Economic growth in the
third quarter is down to an estimated tiny 1.5 percent. Industrial
production continues to fall. Just yesterday, new factory orders
were reported to have dropped 3.8 percent in the month of August
alone, the lowest level in 5 years.
Since this continues to happen despite falling inflation and despite the fact that the monetary aggregates are growing at or
above the top of their targets, there can be only one conclusion,
and that is that the monetary targets are too tight.
Despite my pleas, the Fed last July refused to raise its Mi target
from its 2.5- to 5.5-percent range. A more defensible range of say 4
to 7 percent would have validated monetary policy today, and
would put to rest market expectations that the Federal Reserve
will now shortly move to tighten again and send interest rates up.
My second concern is on the side of the demand for money. Need
I recite again the list of companies, municipalities, and whole industrial and farm sectors of our economy which are starved for
credit and in desperate need of relief. The condition of basic industry, agriculture, small business, housing, automobiles, farm implements, the public infrastructure, has now passed beyond the
domain of mere concern. I believe we are in a full-scale crisis. Yet
we still find, in the playground of our national capital markets,
that such well-heeled operators as Bendix and Martin Marietta can
tap hundreds of millions of dollars of scarce credit for a game of
8
corporate chicken which is completely devoid of redeeming public
economic benefit.
In the international field, we look at the array of dominos teetering on the financial scene—Mexico, Brazil, Poland, Argentina, International Harvester, Massey Ferguson, Dome Petroleum, Drysdale, Penn Square, and hundreds of other less well-known countries and firms.
The question which I raise today in a friendly spirit, but with
deep concern, is how long can the Federal Reserve continue to
close its eyes to this grotesque misallocation of resources. Wouldn't
it have been better in the last years if the Fed had slowed down
bank lending for commodity speculation, for unproductive corporate takeovers, and for excessive and imprudent foreign lending.
Would not that foresighted course have spared the Fed its present position, one of self-proclaimed lender of last resort for the
world, but one of in fact quaking in its boots that its hand may be
called.
I am concerned, gentlemen. And I welcome this chance to explore the nature of the crisis with you and how we may safely get
out of it.
Thank you, Mr. Chairman.
Chairman FAUNTROY. I thank our dean. I want to yield now to
the distinguished ranking member of the subcommittee, the Honorable George Hansen, for comments as well.
Mr. HANSEN. Thank you, Mr. Chairman.
I join with you in welcoming this distinguished panel of witnesses. It is indeed a rare event to have five Federal Reserve district presidents and members of the FOMC testify on the conduct
of their activities in their respective districts, as well as on the national level.
A wide range of topics which we plan to discuss will give us who
serve on this subcommittee, as well as on the full Banking Committee, added insights into the workings of the Federal Reserve
System. It will, so to speak, provide us with a new dimension, new
background against which to appreciate the periodic testimony of
your Chairman, Paul Volcker.
Chairman Fauntroy has provided you with an extensive agenda
of topics, some of them of an administrative, some of them of a factual, some of them of a policy nature. Since our time with you unfortunately is limited, if I could express a preference, I would like
to urge you not to pass over too lightly, in your statements, the
question of the appropriateness of the monetary targets currently
in use by the Federal Reserve and your views on possible alternative procedures.
We know that all of you have given the matter much thought,
and some of you in your speeches and writings have put forward
specific proposals. Not long ago, this subcommittee received testimony on that subject from a number of well-known academicians.
My colleagues and I therefore are looking forward to your testimony with great interest in the expectation that your comments and
recommendations will be valuable for the future conduct of this important aspect of public policy.
Mr. Chairman, with that, I would like to ask unanimous consent
that we enter at an appropriate place in the record, a New York
9
Times magazine article of September 19, 1982, titled "A Talk With
Paul Volcker." In his first interview since his appointment 3 years
ago, the Chairman of the Fed predicts that, if current trends continue, the economy could be entering a period of sustained prosperity.
I think this would be very appropriate to enter in this record, in
the context of the witnesses we have.
Chairman FAUNTROY. Without objection, so ordered. The article
will be entered in the record at this point.
[The New York Times Magazine article follows:]
10
NEW YORK TIMES MAGAZINE, September 19, 1982
AIM
WITH
PAUL
voue
In his first
interview since
his appointment
three years
ago, the
chairman of
the Fed predicts
that, if current
trends continue,
the economy
could be entering
a period
of sustained
prosperity.
By Andrew Tobla»
We are hardly out of the economic
woods. But last June, when Paul A.
Volcker sat for the first extended onthe-record interview since he became
chairman of the board of governors of
the Federal Reserve System, things
were worse.
Yet even then, with the stock market dismally low and headed lower,
with unemployment high and headed
higher, with interest rates stuck in
what some considered an impossible
deadly gridlock — even then, Volcker
made a strong case that much of the
worst was behind us. That this decade, if we keep our wits about us,
could become the reverse of the last
one: falling inflation, falling interest
rates, rising productivity, rising real
wages, falling unemployment.
Given today's improved but still
precarious environment, it sounds almost too good to be true. Is it possible
things could actually go right for a
change?
"This is not an impossible vision,"
Volcker reported to Congress earlier
in the year. "Much of the groundwork
has been laid."
There has been the Fed's own restrictive monetary policy, a steady
"leaning against the wind" of inflation, which Volcker vows to continue.
There have been, too, moves toward
deregulation, a moderating in the demands of labor and changes in the tax
code to encourage investment (one
little-noted result: some 14 million
Americans set up Individual Retirement Accounts in just the first three
months of this year).
"What we're aiming for," says
Volcker, "is a situation in which people can proceed about their business
without worrying about what prices
are going to do over the next year, two
years, three years, 10 years, and can
take it for granted that they're going
to be more or less stable. And in that
kind of environment you ought to
have the interest rates we had in the
mid-60's, anyway."
The prime rate in 1965 averaged 4»/i
percent. Municipal bonds yielded 3%
percent. Home mortgages were still
under 6 percent, as they had been,
with only minor exceptions, for more
than a century.
"Today," he says, "we are acutely
aware of disturbed capital markets,
high interest rates, economic slack and
poor productivity. But when the economy begins to expand, productivity
should rise. That will permit prices to
rise more slowly than wages, encouraging further moderation in wage demands." And further disinflation. "As
confidence returns to securities markets, prices of bonds and stocks should j
rise. Lower interest rates will, in turn, |
support the continuing growth in in- <
vestment and productivity." Things I
could grad(Continued on Page 38) |
Andrew Tobias's most recent book is
"The Invisible Bankers: Everything
the Insurance Industry Never Wanted
You to Know."
NfW T O * TIMES MAGAZINE/SPTEMMM9. 1*H
35
ually get better and better.
"With appropriate budgetary
and monetary discipline, the
process could be sustained for
years."
•
In the broadest sense, the
principal responsibility of the
nation's central bank is to see
to the health of the national
currency: the dollar. Inflation wrecks a nation's currency, and the inflation Volcker
inherited on Aug. 6,1979, was
of a type so prolonged and
virulent that many young
Americans — as he frequently points out — have
never not known it.
In theory, faced with economic and social chaos — for
this is what prolonged, accelerating inflation inevitably
brings — the Fed would get
tough, which it has; and so
would Congress — which it
hasn't. ("The trouble is Congress,"
opined
Business
Week on its Aug. 16 cover.)
Notwithstanding the $98.3
billion tax package the President managed to ram through
recently. Congress has given
us a 1983 budget deficit projected to approach $150 billion. In a recession, such a
deficit, given the size of our
economy, should be tolerable.
Far worse, however, is this:
The deficit is projected at
similar or higher levels in
1984 and 1985. Even with an
economic recovery. (It's one
thing for a family to spend
more than it earns for a
while, after one spouse has
been laid off; quite another to
overspend all the time.)
One best-selling doomsayer
thus describes the Fed's efforts, which he lauds, as "one
hand clapping." Buy gold, he
says, the next round of inflation will be much worse. ("Is
he still saying that?" Volcker
asks.)
There are lots of complicated technical things the
Fed can do to "administer
monetary policy," but really
they boil down to two: The
Fed can ease up, by expanding the money supply, which
it does by buying Treasury securities,
thereby putting
more money in the banking
network; or tighten up, by restricting it (selling those securities).
Here's the way it's supposed to work: If the Fed
pumps money into the system, interest rates — the
price of money — fall.
(Money is like anything else:
When you increase its supply,
its price falls.) Lower interest rates allow more people to
11
buy cars and houses; business booms; unemployment
falls; tax receipts rise;
everything is wonderful.
Except that if you pump
money into the economy
faster than is needed to keep
up with real growth, you fuel
inflation. Pumping new dollars into the system cheapens
those already in existence. ,
So what's been happening
— at least until recently — is
that when the financial markets (which include anyone
with a few dollars to invest)
perceive an easing in money,
they fear a new round of inflation — and so they demand
higher interest rates.
Great I Tighten up and interest rates rise; ease up —
and they also rise. This does
not leave a lot of room to
maneuver.
The trick is for the Fed to be
able to ease up a bit, occasionally, as conditions warrant, while persuading the
financial markets that the
fundamental
anti-inflationary policy has not been abandoned.
It's not enough simply to
say the policy has not been
abandoned.
We've
been
through too much to believe
all the pronouncements of our
elected and appointed officials. That only worked in a
simpler, more innocent time.
Anyone who bought 8& percent 30-year bonds in 1976,
when inflation had been
damped down from double
digits to a mere 5 percent,
trusting promises of a sound
dollar ever after, carries a
deep scar. Volcker appreciates the problem. Credibility
must be earned, he constantly reasserts, by persistence and performance.
Affirms Ashby Bladen, author of "How to Cope With the
Developing
Financial
Crisis," as skeptical of government pronouncements as
anyone: "The only way that
confidence and, therefore,
moderate and stable interest
rates can be restored
is
through a long period of responsible and noninflationary
policies."
"Recently." he adds, "Fed
policy has been rather reassuring."
You've seen the "Peanuts"
classic. Lucy's index linger is
on a football awaiting Charlie
Brown's big toe. "Come on,
Charlie Brown — kick Itl"
she says. Charlie Brown says
no. "Come on, Charlie
Brown," she says, "kick It!"
Every year Lucy plays this
dumb trick on him. Just as he
(Continued on Page 66)
runs to the ball and begins to narrow enough band — which
kick she whisks the ball is not as narrow as some peoaway, and he lands boink! on ple think it is — in a way
his head. This year, he tells that's meaningful in today's
her, he's not going to fall for conditions. But I don't think
it. Lucy swears up and down you can just write a rule
that this year she'll really that's supposed to last for 10
hold the ball — ascribes past years or something" (as it
behavior
to
immaturity, was recently proposed).
What many laymen, and
since outgrown — but Charlie
Brown shakes his head. "I some congressmen, fail to
swear I won't pull the ball grasp, is that economics may
away," she says. "I swear!" be a "science," but it works
This year, she means it. She less neatly in the real world
really, really means it. So, than in textbooks. It's one
trusting soul, Charlie Brown thing to get a couple of chemiruns up to the ball, kicks his cals to react the way they
little heart out — and lands should; people are less preboink on his head. Lucy dictable. You can feed new
dollars into the system, for
laughs hysterically.
example, but how do you feed
"Is it fair to say," Volcker
people the confidence to boris asked, "that this is the nub
row and invest them?
of the whole thing? That your
Consider: If the projected
very biggest problem, in a
way, is somehow convincing budget deficits were smaller,
the financial markets that interest rates would be lower
(because Treasury borrowing
you really, really mean it?"
"Yes. Without killing the and inflationary expectations
would ease). Yet if only intereconomy in the process."
est rates were lower, the
budget deficit would be
smaller (because tax receipts
The Fed is charged with would be higher, expendmanaging the money supply. itures lower).
O.K. — what's money? Cash,
It is one of those circular
of course, and checking-ac- problems very much on the
count balances. But do you in- order of "The only thing we
clude money-market funds? have to fear is fear itself."
Savings accounts? Saving Today's version: "If we had
certificates? Savings bonds? confidence inflation were
(Corporate bonds? Stocks? ending" — and consequently
Options? Diamonds? Base- moderated our wage deball cards?) How about bor- mands,
committed
our
rowing power?
money to productive longIt used to be that the only term investments, and so
way to buy something was to forth — "inflation would
have coins in your pocket. end."
Someone with no coins had no
And yet, one Fed governor
money. Today, someone with
no coins but $2,000 of unused acknowledged, "you can push
credit on his MasterCard can the economy so hard to kill
buy $2,000 worth of goods. Is inflation that you discourage
the investment that killing
that credit line "money"?
Ultimately, says Volcker, inflation was meant to stimuyou could technically get to late."
As the economists at the
the point where nobody keeps
any cash or checking-account Aetna Life and Casualty
balance at all. Everybody Company put it this summer:
runs an overdraft all the "Our central bankers have so
time. "Then what do you call far engineered the economy
the money supply? The total along the razor's edge between reinflation and finanof their overdraft limits?"
"Basically, we've got a cial chaos. The more doctriproblem of interpreting what naire monetarists" — Treasis going on ourselves," Nancy ury Under Secretary Beryl
Hays Teeters, a Fed gover- Sprinkel's crowd—"may call
nor, told The New York this irresponsible. We prefer
Times
recently.
Echoed to call it the application of
Frank E. Morris, the presi- reasoned human judgment.''
dent of Federal Reserve Bank
of Boston: "I have . . . concluded, most reluctantly, that
Given the extraordinary
we can no longer measure the difficulties
Volcker
has
money supply with any kind faced, and still faces, as
of p r e c i s i o n . . . . "
chairman of the nation's cenIf you can't define it or tral bank, it is hard not to
measure it, how do you con- wonder whether he actually
trol it? "Obviously," Volcker likes his job. "Do you like this
responds, "our presumption job?" he is asked as he settles
is that you can do it within a his 6-foot-7-inch frame onto
•
•
the couch under one of two
large paintings in his office (a
garden scene, by the wife of
the staff director for monetary and financial policy). He
is wearing a banker's pinstriped suit and has a sharp
pencil sticking out of the
pocket a dandier soul might
use to display a handkerchief.
The question makes him
laugh. Volcker has a voice
like the largest drum in the
! band, tapped gently, for the
most part, and an almost
Santa-like laugh. He is entirely forthcoming.
"I don't think of it in those
terms," he says, "I really
don't. I know some people
say, 'Gee, is it exciting?' or,
'Are you having fun?' —
that's a favorite question —
and I suppose in some deeper
sense I am, but . . . " (his
voice rises to a low boom as
he laughs) " . . . I don't think
of it as fun on a day-to-day
BA-A-sisl There's a satisfaction, I guess, but it seems to
me you do it because it's here,
and you got picked.'
Volcker got picked by
Jimmy Carter to succeed the
undistinguished
chairmanship of G. William Miller
(1978-79), who had succeeded
Arthur F. Burns (1970-78).
who had succeeded William
McChesney Martin Jr. (195170). There were Fed chairmen before Bill Martin —
Charles Hamlin, in 1914, was
the first — but that's not important. Not important, either, but the principal way
the public has perceived
these men: Burns smoked a
pipe, Miller smoked nothing
and posted a sign requesting
the same of his colleagues
(with mixed results), and
Volcker smokes Antonio y
Cleopatra Grenadiers, $1.45
the half dozen.
Periodically as he speaks,
legs outstretched on the sofa,
he absent-mindedly waves a
match in the air to extinguish
it, then tosses it into a large
pewter ashtray (that reads:
"When You Leave New York,
You Ain't Going Nowhere").
Still smoldering, the match
bounces out onto the hardwood coffee table. Again and
again,
his
interviewer
reaches over to make the
save. Volcker played basketball for Princeton, but only
second string. Now his sport
is fishing. This is important,
since it reflects one of his
principal
attributes:
patience. Two others: consistency and, as one senator put
it near the end of a 190-minute
subcommittee grilling session, "coolness under fire."
Volcker did not succeed Bill
Miller thinking he had all the
answers. "In a very general
way, I thought I had some
sense of what the problems
were," be says. "It's a field
12
I've been in virtually all my
life. But I did not have the
sense that this was an ideal
time — and certainly not an
easy time — to become chairman of the board."
Prior to assuming the
chairmanship,
he
had
presided over the Federal Reserve Bank of New York.
There he earned $116,000. As
chairman of the entire 12bank system, he earns
$60,663. For this princely stipend, some would say, he
bears the weight of the Western world on his shoulders.
But Paul Volcker, 55, does not
appear to be a man raw from
criticism or awesomely burdened. He has no great difficulty sleeping.
"I see myself to a considerable extent as part of an institution," he says. "And not
just the institution of the Federal Reserve, but in a broader
sense as part of a bigger governmental apparatus. I don't
personalize it as much as people outside do." Like the 2,000
construction-industry folk, a
couple of years ago, who
slapped $1.81 in postage on
blocks of 2-by-4's, addressed
them to Paul A. Volcker, ink
on wood, and dropped them in
the mail. "I've become the
symbol for monetary policy.
Maybe I don't feel quite as
burdened as I might if I really
had all the power people think
I have."
(When "leaders in 30
fields" were asked by U.S.
News & World Report to rank
the most influential men and
women in America, Ronald
Reagan ranked first; Paul
Volcker, second.)
Bom in Cape May, N.J.,
Volcker went to Princeton, to
Harvard and to the London
School of Economics. From
there he went to work for the
Fed, for Chase Manhattan,
for the Treasury, for Chase
Manhattan again, for the
Treasury again (Under Secretary for Monetary Affairs)
and then spent a year as a
senior fellow at Princeton's .
Woodrow Wilson School. In
August 1975 he was tapped to
run the Federal Reserve
Bank of New York.
The situation he inherited ;
four years later as chairman
of the Fed was alarming.
"You had a sense in the summer of '79 that psychologically and otherwise inflation
was getting ahead of us. I
suppose we're interested in
inflation in the end because
the economy over a long
period of time cant operate
very well without a stable
"So more forceful action
probably had to be taken, and
it was only a couple of months
after I was here that we
adopted this new operating
technique — I'm not sure we
understood all the implica- I terest rates may be high, but
tions. You never do. But we everybody wants to lend like
understood some of them, crazy. Nobody wants to recertainly."
strain anything — they're all
The new technique, which looking to more inflation. So
remains in effect, was a the general idea of maybe
major refocusing. Rather having to do something more
than concentrate on manag- forceful was not foreign to
ing the level of interest rates me."
in its fight against inflation,
"The President wanted to
as it had done in the past, the put together a big program,
Fed announced in October which I was encouraging him
1979 that it would, from then to do."
on, concentrate on controlling
But what Carter came up
the money supply directly, with was a plan to limit the
letting interest rates fall — or growth of consumer credit.
rise—where they may.
"I did not want to invoke
"What we did was not basi- the Credit Control Act. I
cally a new idea. I'd thought thought it was very much a
about it some, but I can't say two-edged sword. You never
I'd been an advocate of it. It
know what the results of
had some problems. What these sorts of things are going
persuaded me was the need to to be. We were talking about
somehow get a grip on the some narrow sector of consituation, and on psychology, sumer credit, but what specand this seemed to me a way
ter is that going to raise in
to do it.
everybody's mind?" Feder"We had taken some tight- ally mandated credit allocaening moves in August-Sep- tion? Interest-rate controls?
tember that didn't seem to "But we finally went along
make much of an impact. So I with it. The President wanted
to invoke the act, and we
thought, how can we change
the approach a little bit here would have had a confrontation if we refused to administo get people's atTENtion!"
ter it. So we agreed to do
Mr. Volcker's laughter erupts
something in the consumerthrough his words in capital
credit area, and we found out
letters.
that it had a lot bigger psy"One of the things we did
anticipate — that it would in- chological repercussions than
we or the Administration had
ject more instability into the
assumed."
market in the short run —
was not considered altoPurveyors of consumer
gether undesirable at that
credit were told thattothe expoint. A little more uncertaintent they allowed their loans
ty, we thought, might have
to increase, they would have
favorable effects on psycholto pay a small penalty, which
ogy and behavior, speculathey could pass on to their
tive behavior in particular."
customers or not as they saw
Gold had nearly doubled in
fit. Secured loans, for cars
the previous year and its rise
and houses, were not includwas accelerating. In Califored.
nia, people were buying extra
"The action that was taken
houses to capitalize on inflawas frankly the mildest we
tion. From going largely uncould think of. In economic
noticed a decade earlier,
terms it was a small action.
inflation had become so enBut when the President of the
trenched that middle AmerUnited States announces that
ica was devising schemes to
we don't want people using
exploit it.
their credit cards, and that
The
Fed's
refocusing,
measures would be taken, the
which 31 Democratic senamessage that came through
tors are attempting to undo,
was: 'Don't use consumer
was initially well received.
credit!' Including automobile
But interest rates proved
credit and that kind of stuff,
even more volatile than the
which we'd exempted. And
Fed had anticipated and rose
you got a very sharp reaction
higher.
in the economy."
The economy plunged.
"It looked like a recession,
and it went down in the hisThe Fed's second big move
tory books as a recession, but
came in March 1980: the imI guess in retrospect it was an
position of controls on conodd kind of contrived affair.
sumer credit. In hindsight,
We lifted those controls as
not such a great idea.
soon as it looked reasonable
"I think cer-ERtainly, with
to do so, because we didn't
the benefit of hindsight, we
want them on any longer than
would have done a few things
we had to. It was always in
differently during this perimy mind that it would be temod!" booms Volcker. At the
porary."
time, though, something had
Imposed March 14,1980, the
to be done. Inflation was ragcontrols were, partially disIng along at an 18 percent anmantled 10 weeks later and
nual rate. "Despite what we
removed entirely by July 4.
had done up to that point, peoBut if Chairman Volcker and
ple had gotten more scared
his six fellow Fed governors
than they were before, I
knew the controls would be
think.
fleeting, the public was less
"And you kept getting recertain.
ports from the market that in-
•>
"The people who were
really worried were the retailers — and it became quite
dear why. They were worried
about the Christmas season,
when you get a big seasonal
increase in consumer credit.
"Well, I must confess it was
a problem we had not thought
about, because I know in all
my thinking I did not imagine
that the thing was still going
to be on nine months later
during the CHRI-Istmas season! But, from their standpoint, they had to begin planning, and it was a perfectly
natural concern.
"Anyhow, the economy had
this abrupt fall, and the
money supply fell very rapidly with it. It was an artificial reaction precisely to the
consumer-credit
controls.
Consumers suddenly thought
they'd better not use their
credit cards, or consumer
credit at all. But they had
bills to pay, and so they drew
down their cash balances. So
you had this wild decline in
the money supply for six
weeks or so. Interest rates
fell like a stone, too."
And why not? The demand
for credit had been suddenly
stifled. But the action backfired.
"In a sense you had the psychological result that everybody says, "The problem's
over with.' The basic problem
of inflation was not over
with." But once the credit restrictions were lifted, says
Volcker, "it seemed as if
everything was easy again —
business as usual. We lost
some psychological ground."
The money supply began
rising again. "It began
bouncing back, which we
didn't mind for a month or
two because it was just offsetting the decline. What we did
not judge, we nor anybody
else, was that the economic
decline itself was going to be
so short-lived."
The Fed kept expecting
growth in the money supply
to slow down, but it didn't.
"And part of the reason it
didn't," says Volcker, "was
that the economy was picking
up much faster than people
realized. If it hadn't been the
focus of so much attention, I
don't think it would have
made much difference, but
everybody had come to look
at the money-supply figures
as the symbol of policy. And
we were in the midst of an
election campaign, so everybody could attribute political
interpretations to everything
that happened. That didn't
help any."
Down iron nc&rly 20 per*
cent in April 1960to11 percent
by August, the prime hit 21.5
percent in December.
"The net of that long story
Is that the kind of discontinuity introduced by the credit
controls in hindsight was
harmful rather than helpful."
13
now, that when Volcker's J and a kind of willingness to
term expires next August he
support it. I'm not saying you
will be reappointed for anhave to have a majority vote.
other four years. The chair- : You can have a lot of opposiman snorts in amusement.
tion. But I don't think you can
He relights his cigar, bouncsustain a policy whose puring a smoldering match out of
pose nobody understands. So
the ashtray onto the table.
you've got to operate under
"People reach out.and try
that general constraint, if for
to think of something that's
no other reason than if they
going to symbolize what
don't understand it, they
you're after here," he says.
don't think it's going to last.
Which is where you come
"I think that's the root of the
back to your psychological
interest in the gold standard.
point — getting people to beYou're saying, in effect, how
lieve."
about a 'Volcker standard.'
Or other people would say,
write in a monetary rule" —
by which Congress would set
With everyone in "the big
the rate, now, at which the
environment"
screaming
money supply would be alabout interest rates, the eflowed to grow ever after.
fort now is to ease up, insofar
"I wish it were that SIas may be justified, without
IMple," he laughs, "but I
reigniting inflation. That is a
two-part effort. First you
don't think we're going to win
have to figure out how much
it just by hanging out some
dramatic symbolic action, ' easing is justified; then you
have to get the financial marwhatever that action is.
kets to "agree."
That's the basic trouble with
the gold-standard thing —
One might imagine, for exthere are lots of technical
ample, that when the stock
"Sometimes it means there troubles, but the trouble with
market takes a frightening
is no right policy, 1 think. You that argument is: Great,
plunge, the money supply has
know, what seems techni- we're going on the gold standin a sense plunged, too. Stockcally right isn't right if the ard, so 30-year bond rates are
holders feel poorer, can borpsychology is running in the going to go down to 5 percent
row less, spend less freely.
other direction and it makes because investors know we're
"I wouldn't call it the
no impact. It can be very on the gold standard. But
money supply or even the
hard to deal with in the short they know much more than
credit supply, but I agree that
run."
that! We went off the gold
it's a factor," says Volcker.
You can do all the sensible standard 10 years ago, and
"The big engine for this kind
technical things, but if you when you're looking at a 30of stuff has not been stocks
can't persuade the market- year b o n d . . . You know, once
recently, but houses. Everyplace of your long-term inten- you've bit the apple, you can't
body began taking out their
tions and resolve, you've say you haven't left the Garequity with second mortfailed. But how do you per- den of Eden.
gages, convinced that that eqsuade the marketplace withuity was going to increase
"I'm not a disbeliever in all
out killing the economy in the symbolism; in fact, the older
forever and ever."
process?
I get the more importance I
So doesn't the drop in real"That's the basic dilemma. think there is in just conveyestate values give the Fed a
You've got so much underly- ing a message to the public.
legitimate rationale to pump
ing inflationary momentum, You've got to keep things' up the money supply, just by
exaggerated at times, but it's simple in order to affect
way of compensation?
clearly there — reality I'm behavior, without getting
"Yeah, if we just looked at
talking about now." Wages caught by the simplicity of
that I think it is accurate. But
really have been going up what you're SAY-AYing, and
here's precisely where we get
faster than is consistent with having the real world jump
into the problem. Suppose
price stability. Productivity up and bite you."
your analysis is exactly right.
really has stagnated. We
We could say, 'Look, people
D
really have suffered from a
are going to spend less
degree of managerial comYou've also got to take acmoney, and they're going to
placency born of decades of count of political realities.
want higher cash balances
world economic superiority.
"I think these criticisms
because the value of their
People really have bet on the that the Federal Reserve was
houses has gone down. So we
future of inflation. "All this a great engine of inflation are
think precisely the right thing
comes along and collides with really unfair," Volcker says.
to do is to increase the money
a restrictive monetary pos- "An institution does what it
supply by 7% percent where
ture, sooner or later, and can within the framework of
previously we had said we
there is a real collision if a big environment.''
were going to increase it by 5
there isn't enough money to
percent.' How do you explain
Volcker hasn't met with the
permit this momentum to President since February,
that?
continue. There's a kind of but he does meet frequently
"Hey," Volcker goes on,
psychological collision, too, with Treasury Secretary
"we've got that problem right
because behavior doesn't Donald T. Regan, and he
now! It's a more general phechange very readily. And if makes frequent trips to the
nomenon, but it's not unrelatpeople don't believe that Hill. The Fed is independent' ed: People want to be more
you're going to carry thrOU- by law, but laws can be
liquid. And part of being
U-gh, it'll change all the more changed.
more liquid is holding more
slowly!
money in the bank. It's very
"Well. I suppose it's that
"But if it changes too concern put in its crudest . easy to relate it to fear about
slowly," says Volcker qui- form, but you don't even have • the recession, fear about the
financial system.
etly, "then you got an impos- to put It that way. It's not that
sible problem."
Congress goes and legislates
"Now if that phenomenon is
a different policy, which is going on, I think it's true to
D
the ultimate possibility. Your
say you would not want the
To get people to believe the policy Itself is not going to be ' money supply to be as low as
Fed is really going to carry successful if you haven't got a ] it otherwise would have been,
through this time, what would reasonable degree of under- | because in economic terms
you're tighter than you inhe think — just for example standing around the country
tended. BUt try to quantify
— of Reagan's announcing. of what you're trying to do
The net of that long story
may also be that running the
Fed and charting appropriate
monetary policy have as
much to do with psychology
as with finance.
"You do get in that dilemma," Volcker acknowledges.
"Sometimes, the technical
analysis runs in the same direction as the psychology, so
making policy is easy. But
sometimes they run in opposite directions. Then they do
create a dilemma. And the
psychology often runs to extremes. You go back to early
'80 — I mean, people were
really scared 1 'The Federal
Reserve isn't restrictive at
all; this thing is never going
to stop, credit expansion is
going to go on forever* — and
of course within three weeks
the view was all changed, but
that was the psychology that
existed. And you're tempted
to respond to the psychology.
Sometimes I think you have
to. But on purely technical
grounds it can be a mistake.
99-756 0—82
2I
that and try to explain it!"
(The more work any given
dollar bill can do in a year—the
more hands it can pass through
— the greater its "velocity."
And the fewer of them the economy needs to function. So when
velocity increases, the money
supply in a sense increases,
even though the actual number
of dollars in circulation may
have remained constant. By
moving around faster, they can
handle an expanded level of
transactions. To conduct monetary policy, therefore, you must
not only "count" the number of
dollars in the money supply,
you've got to figure out how fast
they're moving.)
It is doubtless a sound economic notion: Dollars frozen
in the checking accounts of
people too scared to spend or
invest them support less economic activity than dollars
that move around faster. But
can the Fed announce an easing in monetary policy based
on such a thing?
Every Friday just past 4
P.M., East Coast time, men
and women throughout the
nation and much of the world
stop what they're doing to
await the weekly money-supply figures (much to the annoyance of the Fed, which
wishes less attention were
paid to the weekly fluctuations). And you expect them
to believe that a huge jump is
O.K. because of some behavioral "phenomenon"?
"Try to explain it to somebody who thinks that the perpetual mistake of the Federal
Reserve has been being too
easy all the time," Volcker
says. "All he'll say is, well,
this is just another rationale
for being too easy. And
there's always the danger
that he's right. So you've got
to be a little cautious about it.
"I suppose we've compromised. We've been restrictive, but not nearly as restrictive as we would have been if
we didn't think that this phenomenon was going on."
D
Volcker is not one who abhors any deficit (particularly
in a recession) or who dreams
of paying off the national
debt. There may be times, he
says — this is not one of them
— when it would be appropriate public policy to pay off
some of the debt, to make
room for more private borrowing. But, he says, "a substantial national debt is not a
problem. In the context of a
huge economy, it's supportable. It's a question of the
speed at which it grows —
that's the risk now."
Part of the problem is an
Administration not entirely of
one mind. It demands lower
spending to finance tax cuts it
insists can't be delayed, but'
insists, too, on much larger
then tax increases to protect
its tax cuts. A larger part of
the problem is a Congress
14
less desperate now. But ends to the Manhattan co-op
through most of the summer, they bought in 1975, "when
at least, much of the nation everybody thought New York
was having a severe — well- was going to go bust." Sometimes she comes to stay in the
founded —anxiety attack.
It is in that context that modest one-bedroom apartVolcker is asked: Can we get ment he rents within walking
out of this economic box? He distance of the Fed.) He went
answers in a way that sug- out and got in the car, behind
gests he knows this box very, the Federal Reserve driver.
very well. (A final match "I look over his shoulder" —
bounces out of the ashtray. As Volcker enjoys telling this
an experiment, the inter- story — "and he's reading a
viewer decides to sit pat. Is book. The name of the book
this man oblivious to the real was: 'How to Make Inflation
world as some of his critics Pay.' I don't know who it was
charge? Slowly, the chair- written by, but it was one of
"There is a great effort by
man leans forward, reaches those books. Two or three
Congress." he told Volcker at
out a long arm and retrieves months ago, you know, we'd
the committee's semiannual
had a string of good price
the match.)
hearing on monetary policy
"Well," he says, "you're statistics, and I keep making
last July » . "to pass the buck
asking the question, I guess, speeches about how things
to you. You are one of the
The doomsayers know exhow big the box is. The box is are going to get better. And
favorite topics of speeches by
certainly tougher, or pieces of there he is reading this book!
congressmen and senators of actly how this goes. Inflation
"I said, 'Mr. Pena, how can
the box are stronger, than you
both parties:'If only we could beats up. so monetary policy
would hope. I think we're you be reading that book?' He
get Oat damn Paul Volcker tightens. But that becomes
about to get out of the box, in says, 'I was in a bookstore the
to do something, all this painful, so political pressure
some sense — but that's a other day and I saw it marked
would go away/ There's is brought to bear. Then,
down from $10.95 to $1.98.' "
projection."
never much talk about fiscal rather than follow through,
A small sign, but a sign.
policy; never much talk the Fed steps on the gas. That
(And. as it turned out, not a
brings
on
worse
inflation,
folMore recently, at the July
about ourrolein it.
bad one.)
by even more painful
"I don't expect anything 20 hearing, Volcker told Con"If we really don't like lowed
followed by hyvery exuberant — and I gress: "The evidence now
these budget deficits, why tightening,
perinflation,
followed
by
wouldn't want anything too seems to me strong that the
don't we just shut up and do complete collapse. If s not
exuberant, because sustain- inflation tide has turned in a
somethtagaboutit?"
certain now many cycles this
ability is very important — fundamental way." Business
Quite a number of con- takes, or which one we're in,
but you get some recovery borrowing, he believes, is no
gressmen are incensed at the but the doomsayers are conFed's intransigence. They vinced that in the midst of the going for a while, and at the longer premised on expectasame time you get interest tions of ever-higher inflation.
are priming the Treasury to current misery, the public
The Fed has lowered the
rates going down, and you get
borrow half a trillion or so to wiU forget how much they
the inflation rate continuing discount rate (the rate it
finance the deficit of the com- hated Inflation. After all,
to go down. I think then things charges depository instituing three years, and they just what's really so terrible
begin interacting in a nice tions) from 12 percent to 10
don't understand why the about a little inflation?
percent. And there's been a
way.
average investor, in the face
"More and more people will
"And if you could restrain a widely perceived easing in its
of this, is not willing to accept
recovery and have the infla- day-to-day market opera4 percent or 6 percent or 8 probably be saying that at
tion rate continue to fall — tions.
percent on a long-term bond, tills point," Volcker agrees.
But inflation, at this stage, is
Does this mean the Fed is
inflation did fall in the last
the way he always used to.
recovery for a year or so — quietly caving in again? Is it
In June, Senator Edward not the harmless little phethen you have a quite differ- the old election-year pump
M Kennedy walked in near nomenon it once was. It goes
ent setting. Suppose the infla- priming, and just in the nick
S e « d t f i session at which to the very roots of trust in
tion rate is falling for two or of time? Volcker says no, of
Volcker was present and government and society.
three years and suppose by course. But does he mean it?
"You know." he says. ".
began decrying the Fed's inthat time you're back to Does he really, really mean
dependence. "If you were up grew up and was educated in
something that people are it?
b m u a member of the the period when advanced
willing to live with. Then
To give in now, he tells
Treasury." he glowered, thinkers said a little bit of
you've won the game in some audiences wherever he
"our relationship wouMbe inflation was a good thing.
People thought they were a
speaks, when so much head••That's all I'm saying: that way has been made in the
Volcker calmly: "That's little richer each year, the
fi were always -a little
some day the good scenario fight against inflation, could
probably true, but I believe profits
ought to feed upon itself. So only greatly complicate matmat it was intentionally de- higher than expected, it's
nice
to
have
the
price
of
your
the question you're raising, I ters over the long run. Too
signed tms way."
Does Volcker ever feel in- bouse going up—and, the ar- think, is: How long does the much has been accomplished
bad scenario feed upon itself not to move ahead and comcredibly frustrated that con- gument ran. all that will lead
to
a
good
economy.
before it gets overtaken by plete the job. "It would strike
gressmen and senators, for
"In fact, I think there „
the good one? I hope we're me as the crudest blow of
selfish political reasons, are
letting the country go down some truth to that, but it's got pretty close to that point. AndT all," he says, "to the millions
a
big
catch:
There's
only
I think we are. But of course who have felt the pain of the
the tubes?
The chairman's eyes widen some truth to it so long as peo- can't prove it."
recession directly to suggest,
at the notion that he would ple are •surprised.' implicitly
in effect, it was all in vain."
D
or explicitly, by the inflation.
listening to him. it's hard
question like that. "You're Once they begin getting the
One night, a few months be- to resist the temptation to put
leaving on the microphone?" sense that Ifs a game, and
fore he made these rather at least some of one's money,
they're
just
trying
to
keep
be asks; then answers only:
prescient comments, the should one be so lucky as to
"Elections obviously dont ahead of it but can't, then
chairman was going to dinner have some money (the chairyou've got an entirely differwith his wife. (Barbara man's own net worth, excluent
set
of
circumstances.
His view of the budget comVolcker is a bookkeeper at t sive of his cc-op, is listed at
"I think that is the waterpromises then sorting their
New York architectural firm. $56,000), into long-term
Way through Congress Is shed we passed In the 70's."
He usually flies up on week- bonds. •
hopeful but realistic: "If they
follow through. It wouW be a
very considerable step in the
right direction. But the time
has probably passed whan
you could have had a sharp W.WattoJr.toMVolctorrs.
topact« Psychology. It's too peatedry at the July 30 hearlau for a bipartisan, 'every.
The situation seems a little
s^th^ sort of thing."
Insiad, you get this sort of
that passed the Initial tax
cuts only after tacking on
many billions in extra cuts of
its own, and that simply cannot summon the nerve to cut
the growth in spending in
politically sensitive areas.
"I remain convinced," Senate Banking Committee
chairman Jake Garn has
said, "that it is the Congress
that is primarily to blame for
the failure of interest rates to
decline as quickly as infla-
thing (from The Wall Street
Journal, Aug. 4): "In a partisan showdown vote, the
House refused to limit to 4
percent the annual cost-of-living increase in Civil Service
retirees' pay, as called for in
the fiscal 1963 budget. The
Democrat-led House, which
had balked at placing the unpopular ceiling on Federal
pensions in this election year,
managed to put Republicans
into the uncomfortable position of having to propose the
limit without Democratic
support if they wanted it
passed. The Republicans refused."
15
Chairman FAUNTROY. We now call upon our first witness, the
Honorable Anthony M. Solomon, president of the Federal Reserve
Bank of New York, who will present the joint statement.
Mr. Solomon, thank you so much for your presence here today.
PANEL OF ANTHONY M. SOLOMON, PRESIDENT, FEDERAL
RESERVE BANK OF NEW YORK, NEW YORK N.Y.; FRANK E.
MORRIS, PRESIDENT, FEDERAL RESERVE BANK OF BOSTON,
BOSTON, MASS.; LAWRENCE K. ROOS, PRESIDENT, FEDERAL
RESERVE BANK OF ST. LOUIS, ST. LOUIS, MO.; E. GERALD CORRIGAN, PRESIDENT, FEDERAL RESERVE BANK OF MINNEAPOLIS, MINNEAPOLIS, MINN.; AND ROBERT H. BOYKIN, PRESIDENT, FEDERAL RESERVE BANK OF DALLAS, DALLAS, TEX.
STATEMENT OF ANTHONY M. SOLOMON
Mr. SOLOMON. Thank you, Mr. Chairman.
I am delighted to be here. And my colleagues and I have presented a joint statement on certain areas, in agreement with the subcommittee.
The areas that we thought we would cover with the joint statement are pricing of Federal Reserve services, difficulties related to
the expansion of reserve requirements, cooperation between the
Federal Reserve banks and the commercial banks and thrift institutions, and the composition of the Federal Reserve bank boards of
directors and their role in the formulation of policy.
In addition to our joint statement, we have each submitted an individual statement covering your remaining questions, which relate
more to the individual activities of our respective reserve banks
and our own views on monetary policy matters.
For convenience, and with your permission, we will present our
summary remarks today on these issues in the same order they are
presented in the written statements. Accordingly, President Corrigan will begin our joint presentation with an overview of the status
of the pricing of Federal Reserve bank services and related matters.
STATEMENT OF E. GERALD CORRIGAN
Mr. CORRIGAN. Thank you, Tony. Thank you, Mr. Chairman.
For convenience of the committee, I will be briefly summarizing
the material that essentially is on pages 2 through about 7 or 8 in
the joint statement. I will not attempt to read it, but just touch on
some of the highlights, if I may, Mr. Chairman.
The Monetary Control Act, as I think we all know, contains a
number of specific provisions designed to guide the Federal Reserve
in the provision of priced services to all depository institutions.
While important, I think those provisions also have to be looked at
in the broader light of the Federal Reserve's historical responsibilities: To encourage efficiency in the payments mechanism and to
insure its safety and integrity.
As you know, Mr. Chairman, the pricing of Federal Reserve services was phased in over a 12-month period that ended in January
of 1982. Five months after the legislation said we should begin pricing, we had in fact fully priced all Federal Reserve bank services. I
think it is also worth noting that in the interval between the sign-
16
ing of the law and the second quarter of 1982, float—Federal Reserve float, which we were supposed to either price or eliminate
and which has an effect on Treasury revenues—has been reduced
from approximately $5 billion to something in the order of magnitude of $1.2 billion. The pricing transition provided a number of
challenges to us, to put it mildly. In some ways I think those challenges can best be visualized by the uncertainties we faced in terms
of what would happen to the volume of the work that went
through Federal Reserve banks when you went from a situation in
which services were in a sense, free—at least free of an explicit
price—to one in which services have an explicit price.
We recognized from the outset that shifting patterns of volume
and the speed with which volume might adjust to the pricing environment, would, of course, have important implications for a variety of things—not the least of which was patterns of resource utilization within the Federal Reserve banks. In fact, the aggregate
volume loss experienced by the Federal Reserve banks since the
advent of pricing has been relatively modest, although there have
been some fairly sharp differences from one office to the next. If
you look at all services, at all 12 banks and their branches and
field offices, the volume drop since the advent of pricing has been
about 20 percent. But if you adjust that to take account of changes
in the mix of particular types of work, 15 percent is probably a
better working number.
I would comment on the check area in particular. It is the biggest area by far, and the general patterns there have been similar
to the overall statistics I mentioned a moment ago. Apart from
looking at what has happened to volume, we think, and I think
most others would agree, that another convenient way of seeing
where we are is looking at the situation in terms of what our revenues are vis a vis our costs. As you know, the law specifically says
that we have to conduct this endeavor in a way that, over the long
run, our revenues match our costs—including the so-called private
sector adjustment factor designed to take account of capital costs,
profits and taxes on the private sector firms.
In the early months of pricing, the Reserve banks as a group encountered a fairly sizable gap between total revenues and total
costs which, for a short time, was on the order of 30 percent. That
gap, of course, reflected a combination of factors, including volume
losses, the inherent difficulties in making resource adjustments in
the short run, and some of the inherent difficulties in trying to establish prices for the first time. Those considerations notwithstanding, in recent months that revenue gap has narrowed appreciably.
For example, based on preliminary data, for the 3-month period
ending in August of this year, the revenue gap was on the order of
15 percent. That means in a practical, business sense that the Reserve banks as a group were recovering all of the direct costs of
providing these services but had not yet gotten to the point where
they were recovering the private sector adjustment factor.
We fully anticipate that even over the balance of the year, further progress will be made in narrowing that gap and that in fact
it will be eliminated sometime next year. At that point we expect
to be covering all costs, including the private sector markup.
17
You asked a specific question, Mr. Chairman, about the effects of
pricing on Federal Reserve bank employment. Again, I will not go
into that in any great detail, except to make two points. I think
this committee recognizes that for a long period of time, indeed
going back to roughly 1964, there had been significant reductions
in employment in the back office operations of the Federal Reserve
banks, aggregating to something on the order of 17 percent over
the period 1974 to 1980. Since the advent of pricing in 1981, employment in our check processing operations—which are by far our
most labor-intensive activity—has declined by something on the
order of 13 percent, which is roughly in line with the volume loss
that we have experienced over that period of time. And I would
expect that we will see further, but more modest, reductions in the
months ahead.
I would emphasize, Mr. Chairman, that these employment reductions at all of the Reserve banks have been achieved in a manner
that has sought to, and we believe has minimized the impact of
these dislocations on our employees. This objective has been accomplished through a combination of things, including attrition, in the
normal turnover sense of the word; retaining and retraining people
and assigning them to other areas of the bank; and in some cases
through voluntary separations supported by early retirement provisions, severance pay, and programs designed to assist affected employees in finding other employment. While it is difficult to be precise, I do believe that it is fair to say that the vast majority of the
work force reduction that we have experienced, not just in the postpricing period, but in the post-1974 period as a whole, has basically
been accommodated through what I would call normal employee
turnover and attrition.
That is admittedly a rather broad brushed summary of how
things have happened. I cannot begin, however, to capture in a
summary the full scope of the challenge this has represented to the
Reserve banks. We think the initial transition to the priced service
environment has been completed in a timely manner, but much remains to be done. For example, right now there are important and
controversial changes in check collection procedures that have
been proposed by the Federal Reserve that will significantly accelerate the collection of checks.
Similarly, in the very near term, we will be announcing the details of the next, and what I hope will be the last, phase of our
float reduction and pricing efforts. In these and other efforts, we
will remain sensitive to the variety of institutions that are affected
by our service policies, the requirements of the Monetary Control
Act, and our broader responsibilities to the payments mechanism
that I mentioned earlier.
I think good progress has been made in a relatively short time.
We are well down the road to fulfilling the objectives and expectations of the Monetary Control Act in this area, Mr. Chairman.
Thank you.
Chairman FAUNTROY. Thank you, Mr. Corrigan.
Mr. SOLOMON. Mr. Chairman, you asked for our views in regard
to the burden on extending the reserve requirements provisions of
the Monetary Control Act to more than 40,000 depository institutions. Since the House has already acted on the committee's bill,
18
which we think is a fine approach, I really won't say very much
about it. It provides for a $2 million reservable liability exemption,
and that reduces very substantially to approximately 20,000 the
number of depository institutions that would have to keep reserves
with us, and yet it permits us to maintain effective monetary
policy control.
If you have any specific questions, I have given some more detailed information in my statement, but I think that the House
action on this and the expectation that the Senate will also act
with respect to the provision in the Garn bill which is roughly
analogous, and we would hope that this legislation will go forward.
Chairman FAUNTROY. We are confident it will.
Mr. SOLOMON. President Morris from Boston will comment on
the remaining part of the joint statement, Mr. Chairman.
STATEMENT OF FRANK E. MORRIS
Mr. MORRIS. Mr. Chairman, your questions referred to the
makeup of our directors, to the representation of women and minorities on our boards, and to the issue of representation of the
thrift industry on Federal Reserve bank and branch boards. Our
statement indicates that we have made considerable progress in
recent years in increasing the number of minorities on our board.
We have done extremely well as far as women are concerned. We
now have two Reserve banks whose boards are chaired by women.
We have done less well in recruiting minorities to our boards, and I
think we ought to strive to do a better job in the future in this respect. We are limited of course by the nature of the act in that the
Federal Reserve Board appoints only three members of the Board.
The other six Board members are elected by the bankers.
Under present law, the issue of thrift representation can probably best be resolved by having the Board of Governors begin the
process of electing representatives of the thrift industry to our
boards through the vehicle of the class C directorship, which is appointed by the Board. Our statement did not get into the issue of
broadening the size of the boards, but as you know, the Federal Reserve Board has in the past been supportive of the idea of expanding the class C directorship to five from three, which would give us
room to add thrift representatives to our board. In the meantime,
most of the Reserve banks have set up thrift advisory groups. We
meet in Boston fairly regularly with a group composed of representatives from the mutual savings banks, S. & L.'s, credit unions.
This gives them a vehicle for communicating to us their problems,
the kind of changes that they would like to see in Federal Reserve
services and so on. I think this is serving as a bridge until the
broadening of the numbers on the board can give us a little more
leeway for increasing representation from the thrifts. Your questions also asked about the participation of our directors in the formulation of monetary policy. The directors have an influence in
several ways. The only direct input they have is that they vote at
every meeting on the discount rate. They are encouraged by the
board, when they vote on a discount rate change, to inform the
Board of Governors of their reasons for the change. Thus we have a
continual flow of information into Washington from these very rep-
19
resentative groups of people in the regions as to how they view the
economy and how that ought to be reflected in monetary policy,
with particular respect to the discount rate. I can assure you that
our directors feel themselves quite capable of communicating their
views to the Board, and they do it quite vigorously. In addition to
that, our directors provide the bank presidents with a very valuable source of intelligence as to what is going on in the community,
in the local businesses, which gives us a jump on the economic statistics.
As you know, many statistics can come in 4 to 6 weeks behind
the events. The stream of intelligence that we get from the directors brings us, a little ahead of the actual data, a better feel for
what is going on in the economy. Each of the Reserve banks reports to the FOMC—in what we call the "Red Book"— the views of
the directors on the state of the economy in their region, and what
sorts of changes they are seeing. I think the board members and
the rest of us find it a very valuable source of input when it comes
to FOMC deliberations.
Finally, of course, not relating to monetary policy, but very important to all of us, our board of directors provides us with a source
of management expertise which we tap very vigorously in helping
us run our banks more effectively.
I think that concludes my summary, Mr. Chairman.
Chairman FAUNTROY. I thank you.
Mr. Solomon.
Mr. SOLOMON. That concludes a quick summary of the joint statement areas. What I understand the subcommittee would like is for
us to give our individual statements, which summarize research, affirmative action, and our individual views on monetary policy. I
would suggest that we start with President Boykin, to give his individual statement, if that is agreeable with you.
Chairman FAUNTROY. That is fine.
We will enter into the record your joint statement in its entirety
at this point.
[The joint prepared statement of the Federal Reserve bank presidents testifying follows:]
20
Joint Statement
before the
Subcommittee on Domestic Monetary Policy
of the
Committee on Banking, Finance and Urban Affairs
United States House of Representatives
Washington, D. C.
September 23, 1982
by
Robert H. Boykin, President
Federal Reserve Bank of Dallas
E. Gerald Corrigan, President
Federal Reserve Bank of Minneapolis
Frank E. Morris, President
Federal Reserve Bank of Boston
Lawrence K. Roos, President
Federal Reserve Bank of St. Louis
Anthony M. Solomon, President
Federal Reserve Bank of New York
21
Introduction
We are pleased to have this opportunity to
contribute to your examination of the activities and
policies of the Federal Reserve district banks and their
implications for monetary policy*
After consulting
with the Subcommittee, we are presenting the views of
all five of us in a joint statement on the following
issues:
(1) pricing of Federal Reserve services and
related matters;
(2) difficulties related to the expansion of
reserve requirements;
(3) cooperation between the Reserve Banks on
the one hand and the commercial banks
and thrifts on the other hand; and,
(4) matters related to the Reserve Bank boards
of directors, including the representation
of women, minorities, and representatives
of thrift institutions on the boards, and
their role in the formulation of policy.
The other areas of questioning relate more to
individual Reserve Bank activities and our own opinions
on various issues related to monetary policy.
Accordingly,
in addition to this joint statement we are each prepared
to testify separately regarding these latter issues.
Pricing of Federal Reserve Services
As the Subcommittee knows, the Monetary Control
Act of 1980 (MCA) mandated among other things that all. depository institutions have access to Federal Reserve Bank payment
22
services, and that the Federal Reserve Banks charge
explicit fees for such services.
The MCA further requires
that, over the long run, such fees be set in such a way
as to recover the full costs incurred by the Reserve Banks
in providing these services—including the so-called
"private sector adjustment factor11 (PSAF).
The MCA
specifies that the Federal Reserve should set its fees
giving due regard to "competitive factors and the
provision of an adequate level of such services nationwide."
Finally, the MCA requires that the Fed price (or
eliminate) Federal Reserve float.
The legislative history of the MCA suggests that
our services should be priced in such a way as to encourage
competition and to enhance the overall efficiency of the
payments mechanism.
In this context, we believe that
it is important that these specific mandates of the MCA
also be viewed in the larger context of the Federal Reserve's
traditional and historical public responsibilities relating
to the safety and integrity of the payments mechanism.
Explicit pricing of Federal Reserve payments
services was phased in on a service-by-service basis over
the 12-month period ending January 1982.
Thus, all payments
services were explicitly priced within five months of the
date specified for beginning the implementation of pricing.
Similarly, since the MCA was signed into law, Federal Reserve
23
float has been reduced from about $4.9 billion to
$1.8 billion.
This reduction has increased our payments
to the U.S. Treasury by about $350 million.
The initial pricing of Federal Reserve services
posed a host of difficult questions and issues for the
Federal Reserve Banks.
Not the least of these was the
impossibility of our prejudging, with any degree of
precision, the timing and magnitude of volume adjustments
that would accompany the introduction of explicit prices
for Fed services.
Obviously, shifting patterns of volume
would have important implications for the nature and speed
of resource adjustments made by the Reserve Banks, in the
wake of pricing, as well as for our ability to meet certain
of the specific mandates of the MCA.
In fact, the aggregate volume loss incurred by
the Reserve Banks since the advent of pricing has been
relatively modest, although there have been fairly pronounced
differences from one Fed office to the next.
For all
services at all Federal Reserve offices, the overall drop
in volume has been close to 20 percent.
However, when
allowance is made for volume shifts among the different
Reserve Bank "products," as well as differing patterns
of resource utilization at the Reserve Banks, the volume
decline is more modest, on the order of 15 percent.
24
In the check processing area, which accounts
for about three-fourths of the total cost of all priced
services, we have seen check processing volume decline
by a similar amount, although about half of the decline
in processed check volume was offset by a rise in "fine
sort" or packages of sorted checks handled by the
Reserve Banks.
In addition, the rapidity with which
check volume has fallen off, and the unevenness in this
trend among the Federal Reserve offices, suggests to us
that much of the decline has resulted from the establishment by the commercial banks of local clearing arrangements.
This development, which contributes to the overall
efficiency of the payments mechanism, has long been
favored by the Reserve Banks.
Looking at the overall cost-revenue picture,
the results to date are mildly encouraging.
In the early
months of pricing, the Reserve Banks as a group encountered
a fairly sizable gap (reaching almost 30 percent) between
total costs (including PSAF) and revenues.
That gap
reflected a combination of factors including volume losses,
shifts in the composition of processed volume, the problems
.inherent in making resource adjustments in the short run
and some of the inherent difficulties in the initial setting
of prices.
More recently, the revenue gap has narrowed
appreciably.
For example, we tentatively estimate the
25
revenue gap for the three months ending in August to
average about 15 percent.
Thus, based on these preliminary
data, the Banks as a group are covering all of their actual
costs, but are not yet recouping the 16 percent private
sector adjustment factor.
We anticipate a further narrowing
of the remaining gap over the closing months of this year
and the elimination of the gap during 1983.
The progress that has been made to date in
narrowing the cost/revenue gap reflects a three-pronged
program aimed at cost containment, the repricing of our
services, and efforts to better adapt our services to the
needs of depository institutions.
In all of this, the
Federal Reserve remains sensitive to its underlying
obligation to work toward fostering greater efficiency in
the payments mechanism and to its ongoing public responsibilities regarding the payments system.
In this connection, we would now like to address
one specific matter related to pricing in which this
Subcommittee has expressed a particular interest, namely
the effects of pricing on Reserve Bank employment.
Effect of Pricing on Reserve Bank Employment
At the outset, we should note that long before
passage of the MCA and the implementation of pricing for
Reserve Bank services, the Federal Reserve Banks had undertaken major cost containment efforts.
To a considerable
extent, these efforts were spurred by technological advances
26
that laid the groundwork for significant improvements in
"back office" operations.
At the Reserve Banks, the
emphasis has been on high-speed equipment for processing
checks and currency and the adaptation of state-of-the-art
telecommunications technology to our funds and securities
transfer services.
Through these efforts, the Reserve
Banks have been able to achieve major reductions in the
real unit costs of providing services between 1974 and 1980.
These developments have served to enhance the
efficiency of the payments mechanism.
The associated
containment of operating costs has also worked to increase
the payments made annually to the United States Treasury.
The emphasis the Reserve Banks, have placed on
improving the efficiency of our back office operations has,
of course, resulted in substantial reductions in employment.
For example, between 1974 and 1980, total Federal Reserve
employment in these areas fell by more than 17 percent.
Since the onset of pricing in 1981, employment in check
processing alone has been reduced by nearly 13 percent,
or 720 people on a Systemwide basis, and we would expect
further, although more modest, reductions in the months
ahead.
These employment reductions have been achieved in
a manner that sought—and we believe successfully—to minimize the impact of these dislocations on our employees.
objective has been accomplished through a combination of
This
27
attrition, retraining and reassignment of employees in
the affected departments to other areas of our operations
and voluntary separations supported by early retirement
provisions, severance pay, and assistance in finding other
employment.
While it is difficult to be precise, we
believe it is fair to state that normal employee turnover
and attrition have accommodated the vast majority of the
workforce reductions that have occurred in the Reserve
Banks, not just in the post-pricing periods, but for the
post-1974 period as a whole.
In the foregoing remarks, we have outlined with
a necessarily broad brush the initial experience of the
Federal Reserve Banks in operating in a priced service
environment.
What is not and cannot be captured in such
a summary is the scope of the challenges this transition
has represented to the Reserve Banks.
Indeed, while the
initial transition to a priced service environment has
been completed in a timely manner, much remains to be done.
'For example, important (and controversial) changes
in check collection procedures that will significantly accelerate the collection of checks have recently been proposed
by the Federal Reserve Banks.
Similarly, in the near term,
we will be announcing the details of the next (and, we hope,
the last) phase of our float reduction and pricing efforts.
In these and other efforts, we will remain sensitive to the
28
requirements of the MCA, the views and needs of a wide and
diverse group of depository institutions and to our continuing responsibilities regarding the efficiency and
integrity of the payments mechanism.
In all of this, we
believe good progress has been made in a relatively short
amount of time and that we are well on the road to fulfilling
the expectations embodied in the MCA.
We might add that to a significant degree our
progress to date has been facilitated by coordination and
cooperation among the 12 Federal Reserve Districts.
Each
Reserve Bank administers prices locally for certain services
furnished in its territory based on relevant volume, cost,
and other factors for those services.
Broader questions of
pricing policy and strategy are coordinated through the
System Pricing Policy Committee chaired by President Corrigan,
which includes both Federal Reserve Board and Reserve Bank
personnel, and the Conferences of Presidents and First Vice
Presidents of all 12 Reserve Banks.
Reserve Requirements
A major objective of the MCA was to extend
reserve maintenance and reporting requirements to all
depository institutions in order to attain a higher degree
of control over the money supply.
This approach has
obviously entailed significant costs as well as benefits«
From the standpoint of the Reserve Banks, both the large
29
increase in the volume of data to be handled and the need
to service and collect data from a wide range of new
institutions—most of them very small and with differing
financial structures—led to a substantial increase in
resources dedicated to this activity—both human and
computer.
These additional costs to the System were a
natural consequence of the imposition of universal reserves.
As for those depository institutions that were
subjected to reserve requirements for the first time,
the additional burdens imposed upon them fall into two
broad categories:
the cost of holding reserves in the
form of non-interest bearing assets, and the operating
costs associated with reporting requirements.
We recognized
early on that relatively little additional improvement in
monetary control would result from imposing these burdens
on the thousands of very small institutions; thus, there
has been a broad consensus within the Federal Reserve—
as, we believe, in the Congress as well—that the smaller
institutions be exempted from the more burdensome aspects
of reserve requirements where possible.
The only question
is how best to do this.
To date, the potential problem posed by the
imposition of reserves on these smaller institutions has
been held to a minimum.
The Congress made an important
contribution in this regard by allowing for the orderly
phase-in of reserves for nonmexnbers.
99-756 0—82
3
We have seen a high
30
degree of cooperation among the nonxnember banks, the thrifts,
the credit unions and their respective primary supervisors
in smoothing the phase-in of reporting and reserve requirements.
For our part, the Reserve Banks have made intensive
efforts to minimize the burdens as well.
We have permitted
the small institutions—under $15 million in deposits—that
are not exempt from reporting requirements to file reports
with us quarterly—rather than weekly—at their option.
We have also held field meetings which have enabled us to
make contact with literally thousands of institutions to
explain reserve requirements and our reporting and reserve
maintenance procedures.
As you know, the Federal Reserve Board has been
providing an administrative deferral from reserve and
reporting requirements for institutions with less than
$2 million in deposits measured as of year-end 1979.
This
administrative deferral is scheduled to expire at the end
of this year and we believe it should be replaced by
legislative action of a more permanent nature.
In this
regard, we are pleased that the House has acted favorably
upon the proposed Reserve Requirements Reform Act of 1982
(H.R. 6222) which represents a sensible approach to this
matter, in our view.
It provides that the first $2 million
in reserveable deposits for all institutions (with an
annual adjustment) would be exempt from reserve requirements.
31
In testifying on the Senate proposal toward the
same ends last fall, Chairman Volcker indicated that
either the $5 million deposit size cutoff in that bill,
or exempting the first $2 million in reserveable liabilities—
the approach taken in your bill, Mr. Chairman—was acceptable.
More recently, in testimony before this Subcommittee
regarding your proposal, Vice Chairman Martin expressed the
Board's support for a legislative solution to replace its
administrative exemption.
To put the matter into perspective, of some
40,000 depository institutions in the United States only
a bit more than half are presently filing regular deposit
reports.
(Substantially all of the non-reporting institutions
are credit unions.)
Furthermore, approximately 80 percent
of the institutions that do report need not actually hold
reserves with the Reserve Banks.
This is because their
reserve requirements can be and are being met by their
holdings of vault cash.
In a sense, no additional monetary
cost is being imposed on them—other than the cost of
reporting itself.
In the absence of legislation along the lines of
the bill passed by the House last week, the result would
be that an additional 18,000 depository institutions—
44 percent of the total of such institutions—would have
reserve requirements extended to them when the Board's
administrative exemption expires.
Under your proposal,
32
all of these institutions, plus an estimated 6,000 that
are presently subject to reserves, would be exempt.
In
our view, this should be quite adequate to alleviate
the burdens on the smaller institutions, while not
compromising in an important way the Federal Reserve's
degree of control over the money supply.
On balance,
although other approaches are obviously possible, we
think this approach is a good one and we would endorse
its adoption by the Senate.
Degree of Cooperation Between the
Reserve Banks and the Commercial Banks
and Thrift Institutions
The MCA brought about very significant changes
in the relationship between the Federal Reserve System
and the thrift institutions, as well as large numbers of
commercial banks that had not previously been members of
the Federal Reserve.
We recognized from the outset the
need to open lines of communication to these institutions
and develop working relationships as quickly as possible.
We also recognized the desirability of incorporating their
views and concerns more explicitly into the decision-making
processes of the Federal Reserve System.
One area in which this can and should be
achieved is by providing for representation of these
33
institutions on Reserve Bank and branch Boards of
Directors.
We would like to briefly review some of
the mechanisms that are in place already.
Thrift Institutions Advisory Committees
To date, eight of the Reserve Banks have formed
some type of advisory committee to explicitly solicit the
views and concerns of thrifts and other nonmember depository
institutions.
While the exact format and composition of
these committees vary among the different Reserve Banks,
in general they all provide a forum for the discussion of
the broadest possible range of issues of mutual interest
to the Federal Reserve and the affected institutions.
By
and large, membership of these committees consists of
senior officials of savings and loan associations, mutual
savings banks, and credit unions.
Ih some cases, officers
of the respective trade associations participate as well.
Senior officials of the Reserve Banks meet with these
advisory groups on a periodic basis, and a full interchange of information and advice is encouraged.
These
sessions typically deal with matters such as Reserve Bank
services, discount window administration, and issues arising
in connection with the work of the Depository Institutions
Deregulation Committee.
34
Financial Institutions'
Visiting Program
All 12 of the Federal Reserve Banks have
established formal programs under which their officers or
designated representatives make periodic visits to the
commercial banks and thrift institutions in their Districts.
Many purposes are served by these visits, including:
informing the institutions and their managements, many of
whom have little or no prior direct experience with the
Federal Reserve, of our policies and operations; discussing
and explaining the services offered by the Reserve Bank and
the related prices; assisting in the resolution of operating
problems that may arise in the use of Reserve Bank services
(this is obviously especially important for our many firsttime users); developing a feel for the effect of Federal
Reserve policies at the "micro" level, in terms of the
day-to-day experiences of small depository institutions;
and ascertaining the views of their officers regarding
current trends and developments.
Meetings for Chief Executive Officers
Shortly after the passage of the MCA, the Reserve
Banks began a variety of educational meetings for nonmember
commercial banks and thrift institutions to explain the
implications of that major legislation and to open discussions
with senior officials of the thrift industry.
On an ongoing
basis, about half the Reserve Banks regularly sponsor
35
meetings for chief executive officers of various types of
financial institutions, including the thrifts.
To sum up, we have made much progress in
establishing lines of communication with thrift institutions
and nonmember banks.
Just as important, we have established
close and cooperative relationships with the Federal Home
Loan Banks and other primary regulatory authorities for
these institutions.
Obviously, much remains to be done,
and the mutual learning process goes on—but we are confident
that we are moving in the right direction.
Reserve Bank Boards of Directors
The final topic for which we felt a joint response
was appropriate is the composition of the Reserve Banks'
Boards of Directors, proposals for increasing the representation of thrift institutions on the Boards, and the role
of the Boards in formulating policy.
With respect to the present composition of the
Reserve Bank Boards, in terms of representation of women,
minorities, and the thrift industry, we are submitting the
relevant data from all 12 Reserve Banks and their branches
as an exhibit with this statement.
The exhibit sets forth
the names and primary business affiliations of all of the
directors of the Reserve Banks and their branches, and also
gives breakdowns according to the occupations currently
represented, the number of women and minorities on the
36
Boards, the representation of women and minorities in
each year since 1975, and the representation of thrift
institutions.
While these data should furnish the "long"
answer to your question, we would like now to present the
"short" answer highlighting the more significant points.
First, a very broad spectrum of interests and
backgrounds is represented on the boards of the Reserve
Banks and their branches.
The occupations occurring most
frequently are, in descending order, banking, manufacturing,
education, agriculture, real estate and construction,
wholesale and retail trade, non-bank financial institutions,
and services.
Over the 1975 to 1982 period, progress
has been made in adding women and minorities to our
boards:
-
The number of women on Bank and branch
boards has grown from four in 1975, about
one percent of all Reserve Bank directors
to 30 in 1982, for about 11 percent of the
total. This includes 11 women on the
Reserve Bank head office boards, of which
two presently serve as Chairpersons.
There were 13 minority group members, or
5 percent of the total in 1975 and^16 minority
group members, or 6 percent of the total this
year, with somewhat higher representation
in the 1979-1981 period. One minority group
member presently serves as a Deputy Chairman
of a Reserve Bank board.
We believe there is room for improvement in
representation of minority group members and women on the
37
Reserve Bank and branch Boards of Directors, and we
consider increased participation by both groups to be an
objective we are committed to achieving.
In this regard/
you have asked us to discuss our plans for achieving
increases in 1983 and beyond.
First, by way of background it should be noted
that there are some practical limitations on the rate at
which progress can be achieved in increasing the representation of women and minorities.
Since the three
directors within each Class serve staggered terms,
normally only one appointment will be made each year in
each Class.
Also, six of the nine directors on the
Reserve Bank boards—those in Classes A and B — a r e elected
by the member institutions, and the degree to which they
solicit recommendations from the Reserve Bank management
varies from District to District.
However, the Board of
Governors does request our recommendations in fulfilling
its reponsibility to appoint the Class C directors, and
this has been a primary vehicle for accommodating additional representation for women and minorities.
On the other hand, a majority of the directors
of the Reserve Bank branches are appointed directly by
the Reserve Bank boards, with the remainder appointed
by the Board of Governors, and the Federal Reserve Act
does not specify any particular qualifications or other
criteria for their appointment.
In addition, there are
38
25 Federal Reserve Bank branches altogether, as compared
with 12 parent Federal Reserve Banks.
Finally, the
branches by and large serve smaller geographic regions
than do their parent banks.
With all of these considera-
tions in mind, we regard the branch boards as a logical
means for increasing the representation of women and
minorities, as well as of thrift institutions.
At the present time, some of the Reserve Banks
have completed their plans regarding appointment of branch
directors for 1983, as well as for recommendations to the
Board of Governors regarding both branch and Class C
appointments to the Reserve Bank boards.
However, we
understand that some other Reserve Banks have not completed their plans, and we can thus reply only in general
terms.
But our understanding is that among those that
have established plans, the proposed representation of
women and minorities—as well as of thrift institutions—
will generally be maintained or increased.
Thrift Institutions
The representation of thrift institutions poses
a somewhat different question from that of women and
minorities.
At present, there are no representatives of
thrift institutions on Reserve Bank boards, and only
5 on branch boards.
There are, however, one Reserve
39
Bank director
and six branch directors who are affiliated
with thrift institutions in a significant capacity—
director, advisory director, trustee, or officer—but not
as their primary occupation.
We in the Federal Reserve are in general agreement
that thrift representation should be increased, especially
now that the thrift institutions hold reserves and have
access to Federal Reserve services under the MCA.
Over the
past several years, the Reserve Banks and the Board of
Governors have examined a variety of proposals to achieve
this objective.
On balance, we would favor the approach
outlined below.
First, there is obviously room to increase the
representation of thrift institutions on the branch boards.
We believe this approach is especially advantageous for
the smaller thrift institutions that furnish credit, and
may seek to use Reserve Bank services, in the regional
territories served by the Reserve Bank branches.
Since
there are no statutory restrictions on the qualifications
of branch directors, the branch boards provide a logical
way to increase their representation in a straightforward
manner.
Second, we favor increased thrift representation
on the Reserve Bank head office boards as well.
In our
judgment, this can be achieved through the present
40
structure, by means of the Reserve Banks making
recommendations to the Board of Governors for appointment of thrift industry representatives in Class C.
Under the Federal Reserve Act, including the 1977
amendments, the Class C directors are appointed to
represent the public generally, giving due—but not
exclusive—consideration to the interests of agriculture,
commerce, industry, services, labor, and consumers.
In our judgment, these criteria are broad enough to
encompass thrift institutions, and do not impose any
legal impediment to their appointment through Class C.
Historically, the Board of Governors had
taken the stance that as a matter of policy representatives of institutions engaged in any form of lending
should not be included in Class C, since the interests
of lending institutions were already represented by
the Class A directors.
However, with the enactment of
the 1977 amendments to the Federal Reserve Act we have
noted, and especially the MCA, this consideration no
longer carries the weight that it did in the early days
of the Federal Reserve System.
Accordingly, we under-
stand that the Board as a general matter is willing
to appoint thrift industry representatives as Class C
directors.
41
Role of Directors in Policy Formulation
Finally, we would like to briefly discuss the
role of our directors in the formulation of policy.
As
you know, the Reserve Bank directors have the initial
responsibility for setting the discount rate, subject to
review and determination by the Board of Governors.
In
discharging this responsibility, the directors regularly
report on, and take into account, general economic and
business conditions as well as economic conditions in
their local areas.
The Boards of Directors may, if they
wish—and often do—communicate these observations
directly to the Board of Governors in connection with
their actions on the discount rate.
Furthermore, in our experience, the directors
often use the opportunity of a discount rate discussion
to comment on underlying economic conditions, monetary
policy, fiscal policy, and related matters.
Indeed, it
is necessary for them to consider and discuss these
matters in order to make well-informed decisions regarding
the discount rate, since that policy tool does not operate
in a vacuum.
The directors'; reports on business conditions
are used by most of the Reserve Banks in compiling the
"Current Economic Comment by District"—which we refer
to colloquially as the "Red Book"—a briefing document
42
given to FOMC members, in advance of each FOMC meeting.
The "Red Book" is prepared for the purpose of aiding the
FOMC in identifying economic and financial developments
in addition to economic expectations in various industries
and regions of the country.
One other way in which the directors serve as
a conduit for regional input to national policy formulation
is through the Conference of Chairmen and Deputy Chairmen
of the Federal Reserve Banks.
This group meets semi-
annually with the Federal Reserve Board in Washington,
affording an opportunity for the interchange of views.
It might be added that these interchanges
operate in both directions.
Their ongoing contact with
Federal Reserve policy formulation through discussion
of the discount rate, as well as through the other
avenues we have noted, enables our directors to communicate the overall thrust of Federal Reserve policy in
general terms to their respective business and regional
communities.
Finally, it should be mentioned that the
directors play a significant role in the oversight of .
the management and operation of the Reserve Banks.
They bring the knowledge and expertise garnered in their
own business and community activities to such matters as '
reviews of budgets, expenses and major capital acquisitions,
development of personnel and compensation policy, appointment of Reserve Bank officers, and operating and financial
audits of Reserve Bank operations.
43
Exhibit I
FEDERAL RESERVE BANK OF BOSTON
Term
expires
Dec. 31
Service
Beoan
President
Bank of Maine, N.A.
244 Water Street
Augusta, Maine 04330
1982
l-i-80
Mr. Henry S. Woodbridge, J r . 1
12-11-28/$!.7b
401-278-8410
Chairman of the Board and
Chief Executive Officer
Rhode Island Hospital
Trust National Bank
One Hospital Trust Plaza
Providence, Rhode Island 02903
1983
1-1-81
Mr. James Stokes Hatch
President
Chief Executive Officer
c/o The Canaan National Bank
Main Street
Canaan, Connecticut 06018
1984
1-1-82
Mrs. Carol R. Goldberg
3-25-31/$345m
617-463-4323
Senior Vice President
The Stop & Shop Companies, Inc.
P.O. Box 369
Boston, Massachusetts 02101
1982
8-3-78
Mr. Joseph A. Baute
1-30-28/$72m
603-352-4448
Chairman and
Chief Executive Officer
Markem Corporation
150 Congress Street
Keene, New Hampshire 03431
1983
1-1-81
Dr. George N. Hatsopoulos
1-7-27/$25Om sales
617-890-8700
Chairman of the Board
and President
Thermo Electron Corporation
101 First Avenue
P.O. Box 459
Waitham, Massachusetts 02254
1984
3-8-82
Class A:
Mr. H. Alan Timm
* l-15-26/$70m **
207-622-7161
8-22-43/$! BOTH
203-824-5423
Class B:
1 - Member, Executive Committee,
Conference of Chairmen
2 - Chairman, Executive Committee,
Conference of Chairmen
3 - Vice Chairman, Executive Committee,
Conference of Chairmen
Date o f b i r t h .
Dollar amounts represent assets of banking institutions, and assets
or annual sales of nonbanking institutions.
44
Class C:
Term
expires
Dec. 31
Group
Service
Began
Mr. Thomas I , Atkins
3-2-39/Not available
212-245-2100
DEPUTY CHAIRMAN
General Counsel
National Associ;tion for the
Advancement of Colored People
1790 Broadway
New York, New York 10019
1982
1-1-80
Mr. Michael J . Harrington
9-2-36/Not available
617-246-3420
Harrington, Keefe, and
Schork, Inc.
40 Salem Street
Lynnfield, Massachusetts
1983
1-1-81
1984
1.-1-79
Mr. Robert P. Henderson
4-9-31/$173ra
617-276-3003
CHAIRMAN
01940
Chairman and
Chief Executive Officer
Itek Corporation
10 Maguire Road
Lexington, Massachusetts 02173
45
FEDERAL.RESERVE BANK OF NEW YORK
Term
expires Service
Dec. 31 Began
Class A:
Mr. Gordon T. Wai 1 is
8-15-19/S16.7b
212-487-6330
Chairman o f the Board
I r v i n g Trust Company
One Wall Street
New York, New York 10015
1932
1-15-8
Mr. Peter D. Kiernan
8-15-23/$2.3b
518-447-44-83
Chairman and President
Norstar Bancorp I n c .
1450 Western Avenue
Albany, New York
12203
1983
1-01-81
Mr. Robert A. Rough
5-9-39/$78m
201-948-3300
President
The National Bank of Sussex
County
Branchville, New Jersey 07826
1934
1-1-82
Mr. William S. Cook
09-06-22/$6.2b
212-826-8208
President
Union Pacific Corporation
345 Park Avenue
New York, New York 10154
1932
8-6-80
Mr. John R. Opel
l-5-25/$27b
. 914-765-4750
President and
Chief Executive Officer
International Business Machines
Corporation
Old Orchard Road
Armonk, New York 10504
19S3
1-14-81
Mr. Edward L. Hennessy, J r .
3-22-28/$5.5b
201-455-4811
Chairman of the Board
Allied Corporation
P.O. Box 3000 R
Morristown, New Jersey
1934
1-01-82
1932
5-17-77
Senior Partner
Shearman and S t e r l i n g , A t t o r n e y s
53 Wall S t r e e t
tew York, New York 10005
1933
2-6-76
Senior Vice President
R. H. Macy & Company, I n c .
151 W. 34th Street
New York, New York 10001
1934
2-10-78
Class B:
07960
Class C:
Dr. Boris Yavitz
6-4-23/1,250 Students
212-280-3401
DEPUTY CHAIRMAN
Paul Garrett Professor
of Public Policy and
Business Responsibility
Columbia University
703 Uris Hall
New York, New, York
Robert H. K n i g h t , Esq.
2-27-19/2nd l a r g e s t in U.S.
212-483-1000
CHAIRMAN
Mrs.
Gertrude G. Michel son
6-3-25/$2.7b
212-560-4312
99-756 0—8
10027
46
BUFFALO BRANCH
Term
Appointed by Federa 1 Reserve Bank:
expires
Dec. 31
Service
Began
Miss M. Jane Oickman
8-14-23/Among top ten
715-856-6565
Partner
louche Boss & Co.
Main Seneca Building
237 Mafn Street - Suite 1602
Buffalo, New York 14203
1982
1-01-77
Mr. Arthur W. Richardson
12-29-26/S1.35
716-262-2982
Chairman of the Board
Chief Executive Officer
Security Trust Company
1 East Avenue
Rochester, New York 14638
1982
1-01-80
Mr, Carl F. Ulmer
ll-17-26/$32m
716-549-1000
President
The Evans National Bank of Angola
Box 191
Angola, New York 14006
1983
1-01-81
Mr. Edward W. Duffy
4-30-26/$18.4b
716-843-5581
Chairman of the Board
Marine Midland Bank, N.A.
One Marine Midland Center
Buffalo, New York 14240
1984
1-01-82
Mr. Frederick D. Berkeley, I I I
8-7-28/$28.7o
716-343-2216
CHAIRMAN
Chairman of the Board and
1982
President
Graham Manufacturing Company, Inc.
26 Harvester Avenue
Batavia, New York 14020
2-02-77
Mr. John R. Burwel)
10-25-39/$2.1m
716-232-2450
President
flotl1ns Container Corporation
100 Kassau Street
Rochester, New Yort 14605
1983
1-01-79
Mr. George L. Uessei
10-2-23/122,000 members
716-852-0375
President
.
Buffalo AR/CI.0 Council
686 E l l i c o t t Square Building
Buffalo, New York 14203
1984
1-01-79
Appointed by Board of Governors:
47
FEDERAL RESERVE BANK OF PHILADELPHIA
Class A:
Term
expires Service
Dec. 31 Began
Group
Mr. Donald J . Seebold
9-6-22/$51.6m
717-275-3740
3
President
1982
6-26-78
The First National Bank of
Danville
Corner Mill and Bloom Streets (P.O. Rox 279)
Danville, Pennsylvania 17821
Mr. Roger S. M l las
4-ll-27/$2.7b
215-585-5228
\
Chairman and President
Provident National Bank
P.O. Box 7648
Philadelphia, Pennsylvania 19101
1983
1-01-81
Mr. Douqlas Eugene Johnson
6-15-39/$185.6m
201-892-1900 x358
1
Chairman and President
Ocean County National Sank
501 Arnold Avenue
Point Pleasant Beach, New Jersey
1984
1-01-82
08742
Class B:
Mr. Eberhard Faber, IV
10-2-2-36/$! 6m.
717-474-6711
1
Chairman of the Board and
Chief Executive Officer
Eberhard Faber, Inc.
Crestwood
WUkes-Barre, Pennsylvania
1982
1-01-80
18773
Mr. Harry A. Jensen
7-17-18/$891m
717-397-0611, X2212
President and
1983
1-01-80
Chief Executive Officer
Armstrong World Industries, Inc.
Liberty and Chariot Streets (P.O. Box 3001)
Lancaster, Pennsylvania 17604
Mr. Richard P. Hauser
12-20-34/$2.4b
215-422-1885
Chairman and
Chief Executive Officer
John Wanamaker
1300 Market Street
Philadelphia, Pennsylvania 19101
1984
1-01-79
-1982
1-01-77
1983
1-01-81
1984
1-01-82
Class C:
Dr. Jean A. Crockett
4-20-19/15,R64 Students
215-243-7637
CHAIRMAN
Robert M. Landis, Esquire
12-21-20/188 Lawyers
215-972-3765
DEPUTY CHAIRMAN
Mr. George E. B a r t o l , I I I
4-20-21/$49.4m
215-732-7700
Chairman
Professor of Finance
Department of Finance
Wharton School
University of Pennsylvania
Philadelphia, Pennsylvania
Partner
Dechert Price & Rhoads
3400 Centre Square West
1500 Market Street
Philadelphia, Pennsylvania
19104
19102
Chairman of the Board
Hunt Manufacturing Company
Suite 1300, 1405 Locust Street
48
FEDERAL RESERVE BANK OF CLEVELAND
Class A:
Term
expires
Dec. 31
Group
Service
Began
Mr. John W. A l f o r d
10-21-12/$248.5m
614-349-8451
Chairman o f the Board and
Chief Executive O f f i c e r
The Park National Bank
50 North T h i r d Street
Newark, Ohio 43055
1982
1-01-77
Mr. J . David Barnes
8-23-29/$14.9b
412-232-4961
Chairman o f the Board
Mellon Bank, N.A.
1983
1-01-81
Director
The Oberlin Savings Bank Co.
Oberlin, Ohio 44074
1984
1-01-82
Mr. John W. Kessler
3-7-36/Not a v a i l a b l e
614-224-9561
President
John W. Kessler Company
100 East Broad Street
Suite 1501
Columbus, Ohio 43215
1982
1-01-80
Mr. E. Mandell de W1ndt
3-31-21/$3.4b
216-523-4617
Chairman of the Board
Eaton Corporation
100 Erieview Plaza
Cleveland, Ohio 44114
1983
1-01-81
Mr. Richard D. Hannan
9-16-30/
513-272-1111
Chairman of the Board and
President
Mercury Instruments, Inc.
3940 Virginia Avenue
Cincinnati, Ohio 45227
1984
1-01-82
Mr. W. H. Knoell
8-l-24/$779.3m
412-343-4626
DEPUTY CHAIRMAN
President and
Chief Executive Officer
Cyclops Corporation
650 Washington Road
Pittsburgh, Pennsylvania 15228
1983
1-15-81
Mr. John D. Anderson
5-17-22/$800»
419-893-5050
Senior Partner
The Andersons
P.O. Box 119
Maumee, Ohio 43537
1982
1-01-81
Mr. J . L. Jackson
l-31-32/$55m
606-231-5310
CHAIRMAN
Executive Vice President and
President - Coal Unit
Diamond Shamrock Corporation
1200 First Security Plaza
Lexington, Kentucky 40507
1984
1-01-79
Mr. Raymond D. Campbell
Mellon Square
Pittsburgh, Pennsylvania
15230
Class B:
Class C:
49
CINCINNATI BRANCH
Appointed by Federal Reserve Bank:
Term
expires
Dec. 31
Service
Began
Mr. Oliver W. Birckhead
6-20-22/$1.2b
513-651-8900
Chairman of the Board and
Chief Executive Officer
The Central Trust Company, N.A.
Fifth and Main Streets
Cincinnati, Ohio 45202
1982
1-01-80
Mr. 0. T. Dorton
6-15-20/$69m
606-789-4001
President
Citizens National Bank
P.O. Box 670
Pa1ntsv11le,' Kentucky 41240
1983
1-01-81
Mr. Richard Fitton
4-18-27/$38Sm
513-867-4711
President and
Chief Executive Officer
First National Bank of
•Southwestern Ohio
P.O. Box 476
Hamilton, Ohio 45012
1984
1-01-81
Mr. Sherrili Cleland
9-21-24/1,250 Students
614-373-4643
President
Marietta College
Marietta, Ohio 45750
1984
1-01-81
Sister Grace Marie Hiltz
4-20-20/3,500 Beds
513-922-9775
President
Sisters of Charity Health Care
Systems, Inc.
345 Neeb Road
Cincinnati, Ohio 45238
1982
1-01-80
Mr. Clifford R. Meyer
9-25-23/Not available
513-841-8225
CHAIRMAN
President and Chief Operating
Officer
Cincinnati Milacron Inc.
4701 Marburg Avenue
Cincinnati, Ohio 45209
1983
5-01-81
Mr. Don Ross
3-29-27/Not Available
606-299-5334
Owner
Dunreath Farm
6335 Winchester Pike
Lexington, Kentucky 40509
1934
1-01-82
Appointed by Board of Governors:
50
PITTSBURGH BRANCH
Term
expires Service
Dec. 31 Began
Appointed by Federal Reserve Bank:
Mr. William D.
3-29-27/$83.3m
304-232-0110
President
Wheeling National Bank
1145 Market Street
Wheeling, West Virginia
1982
1-01-80
26003
Mr. Ernest L. take
12-27-22/$42m
814-725-4541
President
The National Bank of North East
P.O. Box 270
North East, Pennsylvania 16428
1983
1-01-81
Mr. Robert C. Milsom
12-15-24/$6.5b
412-355-2251
President
Pittsburgh National Bank
Fifth Avenue and Wood Street
Pittsburgh, Pennsylvania 15222
1984
1-01-82
Mr. James S. Pasman, J r .
• 12-20-30/$5.2b
412-553-4715
Executive Vice President
of Finance
Aluminum Company of America
1501 Alcoa Building
Pittsburgh, Pennsylvania 15219
1984
1-01-82
Appointed by Board of Governors:
Dr. Robert S. Kaplan
5-2-40/5,500 Students
412-578-2265
Dean
Graduate School of Industrial
Administration
Carnegie-Mellon University
Pittsburgh, Pennsylvania 15213
1982
2-08-80
Mr. MUton G. Hulme, J r .
10-12-26/$243m
412-273-5268
CHAIRMAN
President and
Chief Executive Officer
Mne Safety Appliances Company
600 Penn Center Boulevard
Pittsburgh, Pennsylvania 15235
1983
1-08-80
Mr. Quentin C. McKenna
9-2-26/$312>n
412-539-5221
President and
Chief Executive Officer
Kennametal Inc.
P.O. Box 231
Latrobe, Pennsylvania 15650
1984
1-01-82
51
FEDERAL RESERVE BANK OF RICHMOND
Term
expires Service
Dec. 31 Began
Class A:
Mr. William M. Dickson
11-21-29/541.9m
3O4-647-A50O
President 4 Senior Trust Officer 1982
The First National Bank In Ronceverte
P.O. Drawer 457
Ronceverte, West Virginia 24970
1-01-80
Mr. J. Banks Scarborough
8-20-28/527m
803-346-3181
Chairman and President
1983
Pee Dee State Bank
P.O. Box 458
TimmonsvUle, South Carolina 29161
1-01-81
Mr. Joseph A. Jennings
8-12-20/53.8b
804-782-5202
Chairman and Chief
1984
Executive Officer
United Virginia Bankshares Inc.
and United Virginia Bank
P. 0. Box 26665
Richmond, Ya 23261
1-01-82
Mr. James A. Chapman, Jr.
9-30-21/530.2m
803-472-2121
Chairman of the Board and
Chief Executive Officer
Inman Mills
P.O. Box 207
Inman, South Carolina 29349
1982
1-01-80
Mr. Leon A. Dunn, J r .
10-6-38/515.4m
919-443-4101
Chairman, President, and
Chief Executive Officer
Guardian Corporation and
Subsidiaries
P.O. Box.4305
Rocky Mount, North Carolina
1983
1-01-81
Chairman of the Board and
Chief Executive Officer
Commercial Credit Company
300 St. Paul Place
B a W n o r e , Maryland 21202
1984
1-01-82
Mr. Paul E. Reicbardt
4-26-18/5479m
202-624-6191
DEPUTY CHAIRMAN
Chairman of the Board
Washington Gas Light Company
1100 H Street, H.W.
Washington, D.C. 20080
1982
7-20-79
Dr. Steven Muller
11-22-27/9,555 Students,
5555.2m
301-366-3590
• CHAIRMAN
President
The Johns Hopkins University
Charles and 34th Streets
Baltimore, Maryland 21218
1983
1-1-78
Mr. WHHam S. Lee, III
6-23-29/56.lb
704-373-4283
Chairman of the Board and
1984
Chief Executive Officer
Duke Power Company
P. 0. Box 33189
Charlotte, North Carolina 28242
Class B:
Mr. Paul 6. MUler
12-13-22/55.3b
301-332-3760
27801
Class C:
1-01-82
52
BALTIMORE BRANCH
Term
Appointed by Federal Reserve Bank:
expires
Dec. 31
Service
Began
Mr. Hugh D. Shires
4-14-18/$116.2m
301-777-4600
Senior Vice President
F i r s t national Bank of
Maryland
P.O. Box 1685
Cumberland, Maryland 21502
1982
1-01-80
H P . A. R. Reppert
President
The Union National Bank of
Clarksburg
P.O. Box 2330
Clarksburg, West Virginia 26301
1982
1-01-77
Mr. Joseph M. Sough, J r .
8-8-27/$65m
301-475-8081
President
The First Kational Bank of
St. Mary's
5 East Park Avenue
Leonardtown, Maryland 20650
1983
1-01-78
Dr. Pearl C. Brackett
l-6-19/$6.3m
301-467-9905
Deputy Manager
Baltimore Regional Chapter of
American Red Cross
(MAILING ADDRESS:
4100 North Charles Street
Baltimore, Maryland 21218)
1984
1-01-78
Mr. Edward H. Covell
4-15-21/$18m
301-822-3000
CHAIRMAN
Vice President f o r Governmental
and Industry A f f a i r s
Country Pride Foods Limited
P.O. Box 799
Easton, Maryland 21601
1982
1-01-80
Mr. Robert L. Tate
6-13-24/$25m
301-539-0787
Chairman
Tate Industries
601 W. West Street •
Baltimore, Maryland 21230
1983
1-01-81
Mr. Thomas H. Maddux
10-2-27
301-837-9550
Executive Vice President and
Chief Operating O f f i c e r
Easco Corporation
201 North Charles Street
Baltimore, Maryland 21201
1984
1-01-82
3-4-19/$216.9nj
304-624-3400
Appointed by Board of Governors;
53
CHARLOTTE BRANCH
Appointed by Federal Reserve Bank:
Term
expires
Dec. 31
Service
Began
Mr. W. B. Apple, J r .
11 -4-30/554.2m
919-342-3346 .
President
F i r s t National Bank of Reidsville
P.O. Box 2037
R e i d s v i l l e , North Carolina 27320
1982
12-27-74
Mr. Marvin D. Trapp
12-24-29/$!97m
803-775-1211
President and Chief Executive
Officer
1982
2-11-82
Mr. Nicholas V. Mitchell
5-31-13/$277m
919-725-5371
Chairman of the Board
1983
Piedmont Federal Savings and
Loan Association
P.O. Box 215
Winston-Sal em, North Carolina 27102
1-01-81
Mr. Hugh M. Chapman
9-ll-32/S970m
803-765-8203
Chairman of the Board
1984
The Citizens * Southern National
Bank of South Carolina
P.O. Box 727
Columbia, South Carolina 29222
1-01-79
Dr. Naomi 6 . Albanese
10-17-16/950 Students
919-379-5980
CHAIRMAN
Dean
1982
School of Home Economics
University of North Carolina a t
Greensboro
Greensboro, North Carolina 27412 '
1-01-77
Mr. Wallace J. Jorgenson
10-23-23/57m+
704-374-3761
President
J e f f e r s o n - P H o t Broadcasting Co.
One Julian Price Place
Charlotte, North Carolina 28208
1983
1-01-82
Or. Henry Ponder
3-28-28/2,000 Students
803-254-7253
President
'
Benedict College
Harden and Blanding S t r e e t s
Columbia, South Carolina 29204
1984
1-01-79
The National Bank of South Carolina
P. 0. Drawer 1798
Sumter, South Carolina 29150
Appointed by Board of Governors:
54
FEDERAL RESERVE &ANK OF ATLANTA
Term
expires Service
Dec. 31 Began
Class A:
Mr. Dan B. Andrews
7-13-27/$46m
615-446-5151
President
First National Bank
P.O. Box 666
Dickson, Tennessee 37055
1982
1-1-80
H P . Hugh M. Willson
9-2O-25/$22m
615-745-0261
President
Citizens National Bank
P.O. Box 220
Athens, Tennessee 37303
1983
1-1-78
Mr. Guy W. Botts
7-12-14/$3.7b
904-791-7714
Chairman of the Board
Barnett Banks of Florida, Inc.
P.O. Box 40789
Jacksonville, Florida 32231
1984
1-1-79
Mrs. Jean McArthur Davis
7-9-24/$12m
305-754-4521
President
McArthur Dairy, Inc.
6851 N.E. Second Avenue
Miami, Florida 33138
1982
12-1-77
Mr. Harold B. Blach, Jr.
10-29-31/$6ci
205-322-3551
President
Blach's Inc.
1928 Third Avenue, North
Birmingham, Alabama 35203
1983
1-1-81
Mr. Horatio C. Thompson
8-5-14/$60&n
504-775-6181
President
1984
Horatio Thompson Investment, Inc.
P.O. Box 1027
Baton Rouge-, Louisiana 70821
2-16-79
Mr. John H. Weitnat/er, Jr.
5-21-26/$205a in sales
404-586-2810
DEPUTY CHAIRMAN
Chairman and
Chief Executive Officer
Richway
P.O. Box 50359
Atlanta, Georgia 30302
1982
1-1-80
Mr. William A. Pickling, Jr.
7-23-32/$95a
912-742-1161
CHAIRMAN
Chairman and Chief Executive
Charter Medical Corporation
P.O. Box 209 •
Macon, Georgia 31202
1983
3-6-78
Mrs. Jane C. Cousins
6-29-24/300 licensed
salespersons
305-667-4815
President and
Chief Executive Officer
Merrill Lynch Realty/Cousins
5830 S.W. 73rd Street
Miami, Florida 33143
1984
.:
1-8-82
Class B:
Class C:
55
BIRMINGHAM BRANCH
Appointed by Federal Reserve Bank:
Term
expires
Dec. 31
Service
Began
Mr. C. Gordon Jones
9-27-27/$85m
205-353-0941
President and
Chief Executive Officer
First National 8ank of Decatur
P.O. Box 1488
Decatur, Alabama 35602
1982
1-1-80
M1ss Martha A. Mclnnis
7-28-37/Not available
205-277-7050
Executive Vice President
Alabama Environmental Quality
Association
3815 Interstate Court
Suite 202
Montgomery, Alabama 36109
1982
1-1-80
Mr. Henry A. Leslie
10-15-21/$253m
205-265-8201
President and
Chief Executive Officer
Union Bank and Trust Company
P.O. Box 2191
Montgomery, Alabama 36197
1983
1-1-81
Mr. William M. Schroeder
8-1-42/$26.6m
205-668-0711
Chairman and
President
Central State Bank
P.O. Box 180
Calera, Alabama 35040
1984
1-1-S2
Mr. William H. Martin, I I I
2-17-31/$26m
205-767-0330
CHAIRMAN
President and
Chief Executive Officer
Martin Industries, Inc.
P.O. Box 128
Florence, Alabama 35630
1982
12-4-75
Mr. Samuel R. H111, Jr.
5-19-23/14,000 Students
205-934-3493
President
•
University of Alabama 1n
Birmingham
Office of the President
University Station
Birmingham, Alabama 35294
1983
1-1-81
Mr. Louis J. Willie
8-22-23/$20m
205-328-5454
Executive Vice President
1984
Booker T. Washington Insurance Co.
P.O. Box 697
Birmingham, Alabama 35201
1-1-79
Appointed by Board of Governors:
56
JACKSONVILLE BRANCH
Appointed by Federal Reserve Bank:
Term
expires
Dec, 31
Service
Began
Mr, Whitfield M. Palmer, Jr.
3-28-29/$25m 1n sales
904-732-2715
Chairman
Mid-Florida Mining Company
P.O. Box 367
Ocala, Florida 32670
1982
1-1-80
Mr. Billy J. Walker
3-4-31/$1.8b
904-358-6930
President
Atlantic Bancorporation
General Mail Center
Jacksonville, Florida 32231
1982
1-1-80
Mr. Gordon W. Campbell
8-17-32/$!.2b
813-224-5616
President and
Chief Executive Officer
Exchange Bancorporation, Inc.
P.O. Box 25900
Tampa, Florida '33630
1983
1-1-81
Mr. Lewis A. Doman
3-21-30/$90m
904-433-2299
President
The Citizens and Peoples
National Bank
P.O. Box 1072
Pensacola, Florida 32595
1984
1-1-82
Mr. Copeland 0. Kewbern
8-22-1l/$10m
813-971-0440
CHAIRMAN
Chairman of the Board
Newbern Groves, Inc.
P.O. Box 17237
Tampa, Florida 33682
1982
1-1-77
Mrs. Joan W. Stein
2-2-29/$2&n
904-725-9272
Partner
1983
Regency Square Properties, Inc.
1200 Barnett Regency Tower
Jacksonville, Florida 32211
(MAILING ADDRESS:
P.O. Box 2718
Jacksonville, Florida 32232-0033)
1-1-78
Or. Jerome P. Keuper
1-12-21/5,000 Students
305-723-3701
President
.
Florida Institute of Technology
P.O. Box 1150
Melbourne, Florida 32901
1-1-79
Appointed by Board of Governors:
1984
57
MIAMI BRANCH
Appointed by Federal Reserve Bank:
Term
expires
Dec. 31
Service
Began
Mr. M. G. Sanchez
12-4-34/$409m
305-941-2810
President and
Chief Executive Officer
F i r s t Bankers Corporation of
Florida
P.O. Box T
Pompano Beach, Florida 33061
1982
1-1-80
Mr. Daniel S. Goodrum
7-ll-26/$lb
305-457-5300
President and
Chief Executive Officer
Century Banks, Inc.
P.O. Box 757
F t . Lauderdale, Florida 33302
1983
1-1-81
1984
7-1-82
1984
1-1-82
Mr. E. Llwyd Ecclestone,' J r .
Mr. Stephen G. Zahorian
8-24-38/$160m
813-936-6556
Managing Partner
PGA National
P.O. Box 3267
West Palm Beach, Flqrida
33402
President
Barnett Bank of Fort Myers,
P.O. Box 338
Fort Myers, Florida 33902
i.A.
Appointed by Board of Governors:
Ms. Sue McCourt Cobb
8-18-37/80 Attorneys
305-579-0543
Attorney
Greenberg, Traurig, Askew,
Hoffman, L i p o f f , Quentel
and Wolff, P. A.
1401 B r i c k e l l Avenue - PH-1
Miami, Florida 33131
1982
1-1-82
Mr. Eugene E. Cohen
11-1-17/Not available
305-443-5522
CHAIRMAN
Chief Financial Officer and
Treasurer
Howard Hughes Medical Institute
P.O. Box 330837
Coconut Grove," Florida 33133
1983
1-1-81
Mr. Roy Vandegrift, J r .
President
Roy-Van, Inc.
P.O. Box 619
Pahokee, Florida
1984
2-19-79
12-5-20/$3.6;TI
305-924-5551
33476
KASHVILLE BRANCH
Appointed by Federal Reserve Bank:
Term
expires Service
Dec. 31 Began
Mr. Charles J . Kane
l-2-20/$lb
615-748-4177
Chairman and
Chief Executive Officer
Third National Bank 1n Nashville
Nashville, Tennessee 37244
1982
1-1-80
Mr. John R. King
10-16-24/$60m
615-246-4121
President
The Mason and D1xon Lines, Inc.
P.O. Box 969
Kingsport, Tennessee 37662
1982
1-1-30
Mr. James F. Smith, J r .
12-11-29/$500m
615-521-5134
Chairman and
Chief Executive Officer
Park National Bank
P.O. Box 511
KnoxvWe, Tennessee 37902
1983
1-1-81
Mr. Michael T. Christian
l-24-43/$75m
615-639-2181
President and
1984
Chief Executive Officer
First National Bank of Greeneville
P.O. Box 777
Greeneville, Tennessee 37743
1-1-82
!
Appointed by Board of Governors:
Mrs. Cecelia AdMns
9-3-23/represents
6.3m people
615-256-5284
CHAIRMAN
Executive Director
Sunday School Publishing Board
330 Charlotte Avenue
Room 319
Nashville, Tennessee 37201
1982
1-1-77
Mr. Robert C. H. Mathews, J r .
6-16-27/Not available
615-244-2130
Managing General Partner
R. C. Mathews, Contractor
P.O. Box 22149
Nashville, Tennessee 37202
1983
12-21-76
Mr. C. Warren Keel
12-6-38/5500 Undergrad
615-974-5061
Dean
1984
College of Business Administration
716 Stokely Management Center
The University of Tennessee
Knoxville, Tennessee 37916
1-1-82
59
NEW ORLEANS BRANCH
Term
expires Service
Dec. 31 Began
Appointed by Federal Reserve Bank:
Mr. Patrick A. Delaney
6-19-32/-$1.7b
504-586-7209
Chairman and President
Whitney National Bank of
New Orleans
P.O. Box 61260
New Orleans, Louisiana 70161
1982
1-1-80
Mr. Ben M. Radcliff
9-26-24/5702,000
205-666-7252
President
Ben M. Radcliff Contractor, Inc.
P.O. Box 8277
Mobile, Alabama 36608
1982
1-1-80
Mr. Paul W. HcMullan
2-6-29/$373m
601-544-4211 '
Chairman and
Chief Executive Officer
First Mississippi National Bank
P.O. Box 1231
Hattiesburg, Mississippi 39401
1983
1-1-81
Mr. Jerry W. Brents
ll-10-41/$402m
318-232-1211
President and
Chief Executive Officer
First National Bank
P.O. Box 90rF
Lafayette, Louisiana 70509
1984
1-1-82
1982
1-1-82
1983
1-1-81
1984
1-1-82
Appointed by Board of Governors:
Ms. Sharon A. Perils
11-2-44/Not Available
504-834-3700
Attorney
Suite 215
433 Metalr1e Road
Meta1r1e, Louisiana
Mr. Leslie B. Lampton
7-30-25/$95m
601-948-3472
CHAIRMAN
President
Ergon, Inc.
P.O. Box 1308
Jackson, Mississippi
Mr. Roosevelt Steptoe
11-28-34/
504-771-5020
Chancellor
Southern University
Baton Rouge Campus
Southern Baton Rouge Post Office
Baton Rouge, Louisianna 70813
•
70005
39205
60
FEDERAL RESERVE BANK OF CHICAGO
Class A:
Term
expires Service
Dec. 31 Began
Group
Mr. Patrick E. McNarny
4-16-36/$! 40tn
219-722-4111
2
President
1982
First National Bank of Logansport
One First National Plaza
Logansport, Indiana 46947
1-1-80
Mr. 01 H e Jay Tomson
5-3-36/$35m
515-223-5315
3
President
The Citizens National Bank of
Charles City
P.O. Box 517
Charles City, Iowa 50616
1983
1-1-81
Mr. Roger E. Anderson
7-29-21/$41b
. 312-828-7703
1
Chairman of the Board
Continental Illinois
National Bank and
Trust Company of Chicago
231 South La Salle Street
Chicago, Illinois 60693
1984
8-26-80
Class 8;
Mrs. Mary Garst
3-25-28/Not available
712-684-2266
Manager of Cattle Oivision
Garst Company
218 South Fifth
Coon Rapids, Iowa 50058
1982
Mr. Leon T. Kendall
5-20-28/$756m
414-347-6486
Chairman of the Board and
1983
Chief Executive Officer
Mortgage Guaranty Insurance Corp.
250 E. Kilbourn Avenue
Milwaukee, Wisconsin 53202
1-1-81
Mr. Dennis W. Hunt
3-21-32/$!.3m
712-297-7571
President
Hunt Truck Lines, Inc.
West High Street
Rockwell City, Iowa 50579
1984
1-1-79
Mr. Stanton R. Cook
7-2-25/$947m
312-222-3300
DEPUTY CHAIRMAN
President
Tribune Company
435 North Michigan Avenue
Chicago, Illinois 60611
1982
1-7-80
Mr. John Sagan
3-9-21/$23.5b
313-323-2450
CHAIRMAN
Vice President - Treasurer
Ford Motor Company
The American Road
Dearborn, Michigan 48121
1983
1-30-78
Mr. Edward F. Brabec
12-17-30/6,500 members
312-421-1010
Business Manager
Chicago Journeymen Plumbers
Local Union 130, U.A.
1340 West Washington Blvd.
Chicago, Illinois 60607
1984
2-3-78
1-1-79
Class C;
61
DETROIT BRANCH
Appointed by Federal Reserve Bank:
Mr. Dean E. Richardson
12-27-27/$4.5b
313-222-4970
Chairman
Manufacturers National Bank of
Detroit
Term
expires
Dec. 31
Service
Began
1982
1-1-80
1983
1-1-78
100 Renaissance Center
Detroit, Michigan 48243
Mr. Lawrence A. Johns
10-10-28/$59m
517-772-9471
President
Isabella Bank and Trust
P.O. Drawer 100
Mount Pleasant, Michigan
48358
Kr. James H. Duncan
6-13-25/$1.7b
616-383-9297
Chairman and
Chief Executive Officer
First American Bank Corporation
108 E. Michigan Avenue
Kalamazoo, Michigan 49007
1984
1-1-79
Mr. Thomas R. Ricketts
3-4-31/$3.5b
313-643-9600
Chairman and President
Standard Federal Savings and
Loan Association
2401 W. Big Beaver
Troy, Michigan 48084
1984
3-1-81
Mr. Russell 6. Mawby
2-23-28/$792m
616-965-1221
CHAIRMAN
President and Trustee
W. K. Kellogg Foundation
400 North Avenue
Battle Creek, Michigan 49016
1$82
1-1-80
Dr. Karl D. Gregory
3.26-31/12.000 Students
313-377-3295
Professor; Management and
1983
Economic Consultant
School of Economics and Management
Oakland University
Rochester, Michigan 48063
3-24-81
Mr. Robert E. Brewer
1-9-32/$16.5b sales
313-643-1640
Executive Vice President Finance
K mart Corporation
3100 West Big Beaver Road
Troy, Michigan 48084
1-1-82
Appointed by Board of Governors:
99-756 0—82-
1984
62
FEDERAL RESERVE BANK OF ST. LOUIS
Class A:
Term
expires Service
Dec. 31 Began
Mr.. Donald L. Hunt
9-l-37/$23m
618-295-2364
President
First National Bank of Marissa
111 North Main Street
KaHssa, Illinois 62257
1982
1-1-80
Mr. Clarence C. Barksdale
6-4-32/$3.2b
314-554-6201
Chairman and
1983
Chief Executive Officer
Centerre Bank National Association
P.O. Box 267
St. Louis, Missouri 63166
1-1-81
Mr. George M. Ryrie
11-3-21/$97m
618-463-2211
President
1984
First National Bank & Trust Co.
P.O. Box 517
1-1-79
Alton, I l l i n o i s
62002
Class B:
Mrs. Mary P. Holt
2-26-21/5379,000
501-664-3177
2
President
Clothes Horse
5 Fields Building
University Avenue at "R" Street
L i t t l e Rock, Arkansas 72207
1982
1-1-80
Mr. Frank A. Jones, J r .
4-8-27/$6m sales
(home phone)
901-685-6916
3
President
D1et2 Forge Company
(Mailing Address:
137 Perkins Extended
Memphis, Tennessee 38117)
1983
1-1-81
Mr. Jesse M. Shaver
ll-16-19/$1.5b
502-589-2108
1
Consultant
AlHs-Chalmers Corporation
455 South Fourth Street
Louisville, Kentucky 40202
1984
1-1-82
Mr. Armand C. Stalnaker
4-24-16/51.5b
314-444-0652
CHAIRMAN
Chairman of the Board
1982
General American Life Insurance Co.
P.O. Box 396
St. Louis, Missouri 63166
1-1-77
Dr. Will Urn H. Stroube
6-24-24/13,490 Students
502-745-3151
Department of Agriculture
Western Kentucky University
Bowling Green, Kentucky 42101
1983
2-7-78
Mr. W. L. Hartley G r i f f i n
5-17-18/$400m
314-854-4100
DEPUTY CHAIRMAN
Chairman of the Board
Chief Executive Officer
Brown Group, Inc.
P.O. Box 29
St. Louis, Missouri 63166
1984
1-1-82
Class C:
63
LITTLE ROCK BRANCH
Appointed by Federal Reserve Bank:
Mr. William H. Bowen
5-6-23/5403.6m
501-378-3221
Mr. Will1am H. Kennedy, Jr.
9-8-17/5157.2w
501-534-1131
Chairman and
Chfef Executive Officer
The Cooroerdai National Bank of
Little Rock
P.O. Box 1331
Little Rock, Arkansas 72203
Chairman of the Board
National Bank of Commerce of
P1ne Bluff
P.O. Box 6208
Pine Bluff, Arkansas 71611
Term
expires
Dec. 31
Service
Began
1982
1-1-80
1983
1-1-81
Mr. Gordon E. Parker
l-6-24/$146.3m
501-863-3181
Chairman of the Board and
President
The First National Bank of
El Dorado
P.O. Box 751
El Dorado, Arkansas 71730
1984
1-1-79
Mrs. Shirley J . Pine
9-18-30/9,238 enrollment
501-569-3155
Department of Comaunicative
Disorders
University of Arkansas at
Little Rock
33rd & University
Little Rock, Arkansas 72204
1984
1-1-79
Mr. E. Ray Kemp, J r .
9-15-24/$250.5fli i n s a l e s
501-376-5200
Vice Chairman of the Board and
Chief Administrative Officer
Dillard Department Stores, I n c . •
P.O. Box 486
L i t t l e Rock, Arkansas 72203
1932
3-4-77
Mr. Richard Y. Warner
5-23-29/$980m
501-226-2511
CHAIRMAN
Group Vice President
Wood Products 6roup
Potlatch Corporation
P.O. Box 390
1983
1-1-81
Chairman of the Board, President
and Chief Executive Officer
Arkia, Inc.
P.O. Box 751
Little Rock, Arkansas 72203
1984
1-1-82
Appointed by Board of Governors:
Warren, Arkansas 71671
Mr. S h e f f i e l d Nelson
2-23-41/Sib
501-372-6241
64
LOUISVILLE BRANCH
Term
expires
Dec. 31
Appointed by Federal Reserve Bank:
Service
Began
Mr. Howard Brenner
9-16-19/561.3m
812-547-2323
Vice
Tell
P.O.
Tell
Chairman of the Board
City National Bank
Box 128
City, Indiana 47586
1982
1-1-77
Mr. Frank B. Hower, Jr.
11-26-28/$! b
502-566-2708
Chairman and
Chief Executive Officer
Liberty National Bank and
Trust Company
P.O. Box 32500
Louisville, Kentucky 40232
President and Managing Officer
Greater Louisville First Federal
Savings and Loan Association
One Financial Square
Louisville, Kentucky 40270
1983
1-1-81
1984
1-1-82
Chairman of the Board,
President and Chief Executive
The Owensboro National Bank
P.O. Box 787
Owensboro, Kentucky 42301
1984
3-23-82
Dr. James F. Thompson
6 - 1 - 2 6 / 8 , 0 0 0 Enrollment
502-762-4188
CHAIRMAN
Professor of Economics
Murray State University
Murray, Kentucky 42071
1982
1-1-77
Mr. William C. BaTlard, J r .
9-10-40/*1.3b
502-561-2087
Executive Vice Prtsifent Finance and Administration
Humana, Inc.
P.O. Box 1438
Louisville, Kentucky 40201
1983
12-11-80
Sister Eileen M. Egan
1-11-25/1,000 Students
502-585-9911
President
Spalding College
851 S. Fourth Street
Louisville, Kentucky 40203
1984
1-1-79
Mr. R. I. Kerr, Jr.
4-10-23/*551m
502-587-8891
Mr. John E. Darnell, Jr.
10-20-21/S200m
502-926-3232
Appointed by Board of Governors:
65
MEMPHIS BRANCH
Tenn
Appointed by Federal Reserve Bank:
expires
Dec. 31
Service
Began
Mr. Earl L. McCarroll
5-2-15/$62.3m
501-763-8101
President
The Fanners Bank & Trust Co.
P.O. Box 688
Blytheville, Arkansas 72315
1982
4-13-73
Mr. Wayne W. Pyeatt
9-22-24/Not a v a i l a b l e
901-725-1311
President
Memphis F1re Insurance Company
P.O. Box 40968
Memphis, Tennessee 38104
1983
1-1-81
Mr. Edgar H. B a i l e y
Chairman and President
Leader Federal Savings and
Loan Association
P.O. Box 3410
Memphis, Tennessee 38103
1984
1-1-82
Chairman of the Board and
Chief Executive Officer
Union Planters fictional Bank
of Memphis
P.O. Box 387
Memphis, Tennessee 38147
1984
1-1-82
Executive Vice President
Universal L i f e Insurance
Company
1982
9-22-80
1983
1-1-81
1984
1-1-82
5-8-26/Sl.lb
901-523-2961
Mr. William M. Matthews, Or.
8-25-32/$1.2b
901-523-6101
Appointed by Board of Governors:
Mrs. P a t r i c i a W. Shaw
7-26-39/$56ra
901-525-3641
4-80 Linden Avenue
Memphis, Tennessee
Mr. Donald B. We1s
3-21-35/$1.3m •
501-735-4501
CHAIRMAN
Mr. 6 . Rives Neblett
5-25-43/Not A v a i l a l b e
601-398-5121
38126
President
Tamak Transportation Corp.
P.O. Box 1985
West Memphis, Arkansas
72301
Attorney
Neblett, Bobo 4 Chapman
P.O. Box 63
Shelby, Mississippi 38774
66
FEDERAL RESERVE BANK OF MINNEAPOLIS
. Term
expires Service
Dec. 31 Began
Class A:
Mr. Henry N. Ness
2-21-18/$110m
701-293-2261
Senior Y1ce President
The Fargo National Bank
Main at Broadway
Fargo, North Dakota 58124
1982
1-1-80
Mr. Yern A. Marquardt
7-5-22/$24m
906-524-6172
President
Connerdal National Bank of
L'Anse
1983
1-1-81
President and Chairman of
the Board
The First National Bank of
Baldwin, Wisconsin
P.O. Box 145
Baldwin, Wisconsin 54002
1984
1-1-82
Mr. Joe F. Kirby
12-14-22/J38m
605-336-0850
Chairman
Western Surety Company
908 West Avenue North
Sioux Falls, South Dakota
1982
1-1-80
Mr. Harold F. Zigmund
4-11-19/5186,000
218-327-6201
President and
Chief Executive Officer
Blandin Paper Company
115 South West First Street
Grand Rapids, Minnesota 55744
1983
1-1-81
Mr. WH11am I . Mathers
9-29-23/53.5m
406-232-4425
President
Mathers Land Company, Inc.
314 So. Merriam
Miles City, Montana 59301
1984
1-1-82
Sister Generose Gervais
9-18-19/1,050 Beds
507-285-5158
Administrator
St. Mary's Hospital
2414 South Seventh Street
Rochester, Minnesota 55901
1982
10-10-78
Mr. William G. Phillips
3-3-20/5387.4m
612-340-3301
CHAIRMAN
Chairman and
Chief Executive Officer
International Multifoods
1200 Multifoods Building
Minneapolis, Minnesota 55402
1984
1-1-79
Or. John B. Davis, Jr.
9-14-21/1730 Students
President
Macalester College
St. Paul, Minnesota 55105
1984
1-1-82
1 E. Broad Street
L'Anse, Michigan 49946
Mr. Dale W. Fern
2-25-27/$34m
715-684-3366
Class B:
57101
Class C:
612-696-6207
DEPUTY CHAIRMAN
67
HELENA BRANCH
Appointed by Federal Reserve Bank:
Term
expires Service
Dec. 31 Beaan
Mr. Jase 0. Norsworthy
2-21-26/54.3m
406-252-8432
President
The N.R.G. Company
Box 1315
Billings, Montana 59103
1982
1-1-79
Mr. Roger H. Ulrich
5-15-25/Not Available
406-654-2340
President
The First State Bank of Malta
Malta, Montana 59538
1983
1-1-82
Mr. Harry W. Ne*1on
6-14-31/$97m
406-587-9222
President
First National Bank
P.O. Box 730
Bozeman, Montana 59715
1982
1-1-60
Appointed by Board of Governors:
Mr. Ernest B. Corrick
ll-25-20/$4b
406-258-5511
CHAIRMAN
Vice President and General Manager
Champion International Corporation
Timber!dnds - Rocky Mountain
Operation
(MAILING ADDRESS:
115 Takima Drive
Missouia* Montana 59801)
1982
1-1-81
Mr. Gene 0. Etchart
12-26-15/Not available
406-228-2835
•
Past President
Hinsdale Livestock Company
P.O. Box 429
Glasgow, Montana 59230
1983
1-1-82
68
FEDERAL RESERVE BANK OF KANSAS CITY
Term
expires
Dec. 31
Class A:
1982
5-10-79
Or. Wayne D. Angel!
6-28-30/$8m
913-242-6100
President
1983
Council Grove National Bank
(MAILING ADDRESS: 1341 South
Mulberry, Ottawa, Kansas 56057)
6-13-79
Mr. John D. Woods
12-6-29/$807m
402-348-7990
Chairman and
Chief Executive Officer
The Omaha National Bank
17th and Farnam
Omaha, Nebraska 68102
1984
1-1-79
Mr. Charles C. Gates
5-27-21/Not available
303-744-4288
President and
Chairman of the Board
Gates Rubber Company
999 South Broadway
P.O. Box 5887
Denver, Colorado 80217
1982
1-1-80
Mr. James G. Harlow, Jr.
5-29-34/$1.7b
405-272-3195
President and
Chief Executive Officer
Oklahoma Gas and Electric Co.
P.O. Box 321
Oklahoma City, Oklahoma 73101
1983
1-1-78
*ir. Duane Acker
3-13-31/19,982 Students
913-532-6221
President
Kansas State University
Anderson Hall
Manhattan, Kansas 65506
1984
1-1-82
Mr. Paul H. Kenson
7-22-25/$4.4b
913-676-3301
CHAIRMAN
Chairman
1982
United Telecommunications, Inc.
(MAILING ADDRESS: United Telecom,
Box 11315, Kinsas City,
Missouri 64112)
1-1-77
Mr. John F. Anderson
4-12-24/$2.1b
816-459-6216
President and
Chief Executive Officer
Farmland Industries, Inc.
3315 North Oak Traffic Way
Kansas City, Missouri 64116
1983
1-1-81
Or. Doris M. Orury
11-18-28/7,858 Students
303-753-2427
OEPUTY CHAIRMAN .
Professor of Economics:
1984
Director of Public Affairs
Program - University of Denver
10879 E. Powers Drive
Englewood, Colorado 80111
1-1-80
Mr. Howard K. Loorois
4-9-27/$63m
316-672-5611
President
The Peoples Bank
(MAILING ADDRESS: Krey Co.
Ltd.,
P.O. Box 928, P r a t t ,
Kansas 67124)
Class B:
Class C:
69
DENVER BRANCH
Term
expires Service
Dec. 31 Began
Appointed by Federal Reserve Bank:
Mr. Delano E. Scott
l-3-I9/$77m
303-879-0550
President and Chairman
1982
The Routt County National Bank of
Steamboat Springs
P.O. Box 1237
Steamboat Springs, Colorado 80477
1-1-77
Mr. George S. Jenks
3-ll-27/$900m
505-765-2525
Chairman and
Chief Executive Officer
Albuquerque National Bank
P.O. Box 1344
Albuquerque, New Mexico 87103
1982
1-1-81
Mr. Kenneth C. Maramore
ll-27-20/$127m
307-682-5144
President
Stockmen's Bank & Trust Company
Box 3004
1983
1-1-80
Chairman
Central Bank of Denver
P.O. Box 5548 T.A.
Denver, Colorado 80292
1984
1-1-82
2771 South Eaton Way
Denver, Colorado 80227
1982
1-1-80
President and Chief Executive
Officer
J.W., Inc.
P.O. Box 2850
CooV, Wyoming "82414
1984
2-1-82
G i l l e t t e , Wyoming
Mr. Donald D. Hoffman
11-2-23/$900m
303-893-3456
82716
Appointed by Board of Governors:
Mr. Alvin F. 6rospiron .
4-17-16/Retired
303-988-6930
Vacancy
Mr. James E. Nielson
5-24-40/Not Available
307-578-1322
70
OKLAHOMA CITY BRANCH
Appointed by Federal Reserve Bank:
Term
expires
Dec. 31
Service
Began
Mr. Marcus R. Tower
4-12-20/$l.lb
918-588-6541
Vice Chairman of the Board
Chairman of the
Credit Policy Committee
Bank of Oklahoma
P.O. Box 2300
Tulsa, Oklahoma 74192
1982
1-1-81
Hr. Walter L. Stephenson, Or.
l-22-30/$170m
405-233-3535
Chairman and
Chief Executive Officer
Central National
Bank and Trust Company
P.O. Box 3448
Enid, Oklahoma 73701
1982
1-1-77
Mr. William H. Crawford
5-4-38/$40m
405-335-2126
President and
Chief Executive Officer
First National Bank and
Trust Company
P.O. Box A
Frederick, Oklahoma 73542
1983
1-1-82
Chairman of the Board
1982
1-1-79
1983
1-14-78
Appointed by Board of Governors;
Mr. Samuel R. Noble
8-12-25/Not available
405-226-1900
Noble Affiliates, Inc.
P.O. Box 1486
Ardoore, Oklahoma
Mrs. Christine H. Anthony
12-18-16/Ret1red
405-843-4785
CHAIRMAN
73401
6707 *.W. Grand Boulevard
Oklahoma City, Oklahoma 73116
71
OMAHA BRANCH
Appointed by f e d e r a l R e s e r v e Bank;
Term
expires Service
Dec. 31 Began
Mr. Donald J . Murphy
3-15-18/$475m
402-536-2102
Chairman and
Chief Executive Officer
United States
National Bank of Omaha
P.O. Box .3408
Omaha,' Nebraska 68103
1982
1-1-81
Mr. Joseph 0. Huckfeidt
3-23-34/$59m
308-436-5061
President
Gertng National Bank and
Trust Company
P.O. Box 100
Gering, Nebraska 69341
1983
1-1-78
Mr. William W. Cook, Jr.
2-19-37/$50m
402-228-3333
President
Beatrice National Bank and
Trust Company
P.O. Box 100
Beatrice, Nebraska 68310
1983
1-17-80
Mr. Robert G. Lueder
ll-14-22/$30m
402-339-1000
CHAIRMAN
President
Lueder Construction Company
Suite 500
11128 John Gait Boulevard
Ouha, Nebraska 68137
1982
1-1-79
Mrs. Gretchen S. Velde
8-16-23/Not
402-391-8400
Chairman of the Board
Swanson Enterprises
The Swanson Building, Suite 304
8701 Vest Dodge Road
Ouha, Nebraska 68114
1983
1-1-80
Appointed by Board of Governors:
72
FEDERAL RESERVE BANK OF DALLAS
Class A:
Term
expires Service
Dec. 31 Began
Group
Mr. John P. Gil 11am
12-24-37/$9m
817-932-5204
President and
1982
Chief Executive Officer
First National Bank 1n Valley Mills
Box 278
Valley Mills, Texas 76689
1-1-80
Mr. Miles D. WHson
l-7-33/$39m
713-865-3181
Chairman of the Board & President 1983
The First National Bank of Bellville
P.O. Box 128
Bellville. Texas 77418
1-1-81
Mr. Lewis H. Bond
7-31-21/$2b
817-338-8110
Chairman of the Board and
Chief Executive Officer
Texas American Bancshares Inc.
P.O. Box 2050
Ft. Worth, Texas 76101
1984
1-1-79
Mr. Robert D. Rogers
6-10-36/$313m
214-637-3100
President
Texas Industries, Inc.
8100 Carpenter Freeway
Dallas, Texas 75247
1982
1-1-80
Dr. Kent 611 breath
12-28-45/9,702 Students
817-755-1211
Associate Dean
Hankamer School of Business
Baylor University
Wtco, Texas 76798
1983
3-22-79
Dr. J . . Wayland Bennett
10-13-23/23,129 Students
806-742-2876
Charles C. Thompson, Professor
of Agricultural Finance and
Associate Dean
College of Agricultural Sciences
Texas Tech University
P.O. Box 4190
Lubbock, Texas 79409
1984
1-1-79
Mrs. Margaret S. Wilson
8-7-30/$9m
512-451-8448
Chairman of the Board and
Chief Executive Officer
Searbroughs Stores
P.O. Box 5879
Austin, Texas 78763
i9S2
1-1-77
Mr. John V. James
7-24-18/$2.9b
214-746-6704
DEPUTY CHAIRMAN
Chairman of the Board
Dresser Industries, Inc.
P.O. Box 718
Dal 111, Texas 75221
1983
1-1-81
Mr. Gerald D. Mines
8-15-25/$48(ta
713-621-8000
CHAIRMAN
Owner
1984
Gerald D. Mines Interests
2100 Post Oak Tower
Houston. Ttxas 77056
(MAILING ADDRESS: Federal Reserve
Bank of Dal U s . St*M«« r ft*".-
1-1-79
Class B:
Class C:
73
EL PASO BRANCH
Term
expires
Dec. 31
Appointed by Federal Reserve Bank:
Mr. Stanley J . Jarnnolowski
5-18-39/$34m
915-593-1333
Chairman of the Board and
Chief Executive O f f i c e r
I n t e r f i r s t Bank El Paso,
National Association
Box 9715
Service
Began
1982
7-9-81
1983
1-1-78
El Paso, Texas 79987
Mr. Claude E. Leyendecker
10-15-22/$29.8m
505-546-8871
President
Mimbres Valley Bank
P.O. Box 1050
Denting, few Mexico
88030
Mr. Ernest M. Schur
8-25-18/$175m
915-332-7311
Chairman of the
Executive Committee
I n t e r f i r s t Bank Odessa,
National Association
P.O. Box 4798
Odessa, Texas 79760
1984
3-13-80
Mr. Gerald W. Thomas
8-3-19/17,066 Students
505-646-2035
President
New Mexico State University
Drawer 3BC
Las Cruces, New Mexico 88003
1984
1-1-82
Mr. A. J . Losee
l-18-25/$500,OO0
505-746-3508
CHAIRMAN
Shareholder
Losee, Carson, & Dickerson
Professional Association
P.O. Drawer 239
A r t e s i a , New fexico 88210
1982
1-1-77
Mr. Chester J . Kesey
4-17-25/$3m
915-447-2324
CHAIRMAN PRO TEM
C. J . fcesey Enterprises
(MAILING ADDRESS:
2 Brfarwood Circle
Pecos, Texas 79772)
1983
1-1-78
Ms. Mary Carmen Saucedo
2 - 5 - 2 5 / 6 0 , 1 7 3 Students
915-779-5481
Associate Superintendent
1984
Central Area
El Paso Independent School D i s t r i c t
6101 Hughey Drive
El Paso, Texas 79925
1-1-82
Appointed by Board of Governors:
74
HOUSTON BRANCH
Appointed by Federal Reserve Bank:
Term
expires Service
Dec. 31 Beg-an
Mr. W i l l E. WHson
2-28-16/$325m
713-838-9288
Chairman of the Board and
Chief Executive Officer
First Security Bank of
Beaumont, N.A.
P.O. Box 3391
Beaumont, Texas 77704
1982
1-1-80
Professor Raymond L. B r t t t o n
8 - 2 0 - 2 4 / 2 8 , 9 0 0 Students
713-749-1277
Labor Arbitrator and
Professor of Law
University of Houston
(MAILING ADDRESS: 6146 Olympia
Drive, Houston, Texas 77057)
1983
10-12-78
Mr. Ralph E. David
10-31-27/$80m
713-233-4401
President
First Freeport National Bank
P.O. Drawer H
Freeport, Texas 77541
1984
1-1-79
Vice Chairman
Texas Commerce Bancshares, Inc.
.P.O. Box 2558
Houston, Texas 77001
1984
1-1-82
Mr. Jerome L. Howard
8-4-16/$174m
713-525-8000
CHAIRMAN
Chairman of the Board and
Chief Executive Officer
Mortgage & Trust, Inc.
P.O. Box 2885
Houston, Texas 77001
1982
1-1-77
Mr. Paul N. Howell
9-13-18/$! 39m
713-658-4000
CHAIRMAN PRO TEM
Chairman of the Board and
President
Howell Corporation
1010 Lamar Building
Suite 1800
Houston, Texas -77002
1983
1-1-81
Mr. George V. Smith, Sr.
3-19-26/$5m
713-453-8546
President
Smith PipeftSupply, Inc.
P.O. Box 24099
Houston, Texas 77015
1984
2-29-80
Mr. Thomas B. McDade
6-21-23/$!2b
713-236-5413
Appointed by Board of Governors:
75
SAN ANTONIO BRANCH
Appointed by Federal Reserve Bank:
Mr. George Brannies
12-25-43/$30m
915-347-6375
Chairman of the Board and
President
Term
expires
Dec. 31
Service
Began
1982
1-1-80
The Mason National Bank
P.O. Box N
Mason, Texas 76856
Mr. John H. Garner
4-l-21/$343m
512-881-6878
President and
Chief Executive Officer
Corpus Christi National Bank
P.O. Box 301
Corpus Christi, Texas 78403
1983
1-1-78
Mr. Charles E. Cheever, J r .
5-17-28/$191m
512-824-0444
President
Broadway National Bank
P.O. Box 17001
San Antonio, Texas 78286
1984
1-1-79
President and
1984
1-1-82
Mr. Joe D. Barbee
12-26-23/$!1.4m
512-968-7502
Chief Executive Officer
Barbee-Neuhaus Implement Company
P.O. Box 386
Weslaco, Texas 78596
Appointed by Board of Governors:
Mr. Pat Legan
l-7-21/$14m
512-341-7206
CHAIRMAN PRO TEM
Owner
Legan Properties
4402 Vance Jackson, Suite 200
San Antonio, Texas 78230
1982
1-1-77
Dr. Lawrence L. Crum
7-25-33/43,000 Students
512-471-4368
CHAIRMAN
Professor of Banking and Finance
The University of Texas at Austin
(MAILING ADDRESS: 3920 Sierra
Drive, Austin, Texas 78731)
1983
1-1-80
Mr. Carlos A. Zuniga
U-l-27/$l«n
512-723-6311
Zuniga Freight Services, Inc.
P.O. Box 89
Laredo, Texas 78040
1984
1-1-79
76
FEDERAL RESERVE BANK OF SAN FRANCISCO
Class A:
6roup
Term
expires
Dec. 31
Service
Began
Mr. Frederick 6. LarMn, J r .
12-28-13/$26.1b
213-613-6037
Chairman of the
Executive Committee
Security Pacific National Bank
P.O. Box 2097, Terminal Annex
Los Angeles, California 90051
1982
1-1-77
Mr. Ole R. Mettler
9-7-17/$197«n
209-334-1101
President and Chairman
Fanners & Merchants Bank of
Central California
P.O. Box 380
Lod1, California 95240
1983
1-1-78
Mr. Robert A. Young
10-28-20/$51m
206-695-1311
Chairman and President
Northwest National Bank
P.O. Box 1867
Vancouver, Washington 98668
1984
1-1-79
Hr. Clair L. Peck, Jnr.
11-18-20/Not available
213-381-6711
Chairman of the Board
C. L. Peck Contractor
1982
1-1-74
Mr. J. R. Vaughan
1-28-16/Not available
213-626-8484
Senior Member
Richards, Watson, Dreyfuss &
Gershon
333 South Hope Street
Los Angeles, California 90071
1983
1-1-78
Mr. George H. Weyerhausen
8-8-26/$4.9b
206-924-3000
President and CEO
Weyerhauser Company
Tacoma, Washington 98477
1984
1-1-82
Class B:
3303 Wilshire Boulevard
Los Angeles, California 90010
Class C:
Mrs. Caroline Leonetti Ahmanson Chairman of the Board
4-12-18/275 Students
Caroline Leonetti, Ltd.
213-275-4282
c/o Mrs. Howard Ahmanson
CHAIRMAN
9500 W11sh1re Boulevard
1982 . 1-1-80
Hollywood, California 90212
Mr. Alan C. Furth
9-16-22/$4.3b
415-541-2136
DEPUTY CHAIRMAN
Mr. Trtd W. Andrew
1-25-27/$68.3m
805-832-1111
President
Southern Pacific Company
1 Market Plaza
San Francisco, California 94105
President and Chief
Executive Officer
Superior Firming Company
3501 Stockdale Highway
Bakersfield, California 93309
1984
1-1-80
1983
1-1-80
77
LOS ANGELES BRANCH
Term
expires
Dec. 31
Appointed by federal Reserve Bank:
Mr. Bram Goldsmith
2-22-23/$1.4b
213-550-5711
Chairman of the Board
City National Bank
400 North Roxbury Drive
Beverly M i l s , California
Service
Began
1982
1-1-80
90210
Mr. William L. Tooley
4-23-34/2.5m s q . f t .
of o f f i c e space
213-382-8211
Managing Partner
Tooley and Company,
Investment Builders
3303 WHshire Boulevard
Los Angeles, California 90010
1982
1-1-82
Mr. James 0 . McMahon
1-20-26/$ 100m
805-255-9611
President
Santa Clarita National Bank
23929 W. Valencia Boulevard
Valencia, California 91355
1983
1-1-78
Chairman and
1984
Chief Executive Officer
C a l i f o r n i a Federal Savings
. 5670 W1lsh1re Boulevard - 15th floor
Los Angeles, California 90069
1-1-82
Mr. Robert R. Dockson
11-6-17/$6b
213-932-4001
Appointed by Board of Governors:
Mr. Togo W. Tanaka
l-7-16/$5m
213-620-5760
President
Gramercy Enterprises
445 South Figueroa, Suite 3750.
Los Angeles, California 90071
1982
1-1-79
Mrs. Lola M. McAlpin-Grant
9-23-41/1,223 Students
213-642-2914
Assistant Dean
Loyola Law School
1440 West Ninth Street
Los Angeles, California
1983
1-1-80
1984
1-1-82
Mr. Bruc« M. Schwaegler
4-23-37/$500m
213-486-5363
CHAIRMAN
99-756 0—82
6
90015
President
Bullock's - Bullocks V11shire
7th and H111 Street
Los Angeles, California 90014
78
PORTLAND BRANCH
Appointed by Federal Reserve Bank;
Mr, Herman C. Bradley, J r .
4-23-31/Slim
503-998-8734
Mr. William S. Naito
9-]6-25/$llm
503-228-7404
President and
Chief Executive Officer
Tr1-County Banking Company
P.O. Box 377
Junction City, Oregon 97448
Vice President
Norcrest China Company
P.O. Box 3458
Portland, Oregon 97208
Term
expires
Dec. 31
Service
Beqan
1982
5-28-31
1983
1-1-81
Mr. Jack V. 6ustave1
• 12-31-39/$84m
208-654-1446
President and
Chief Executive Officer
The First National Bank of
North Idaho
P.O. Box 1409
Coeur d'Aiene, Idaho 83814
1984
1-1-79
Mr. John A.* Elorriaga
10-2Q-23/$'5.1m
503-225-5778
Chairman of t'he Board and
Chief Executive Officer
United States National Bank
of Oregon
P.O. Box 4412
1984
1-1-82
Portland, Oregon
97208
Appointed by Board of Governors:
Mr. P h i l l i p V. Schneider
9-22-13/4,000,000 members
503-292-2759
Former Northwest
Regional Executive
National W i l d l i f e Federation
8755 S.W. WoodsIde Drive
Portland, Oregon 97225
1982
1-1-78
Mr. John C. Hampton
2-10-26/Hot available
503-297-7691
CHAIRMAN
Chairman and President
1(11 lamina Lumber Company
9400 Southwest Barns Road
Suite 400 . •
Portland, Oregon 97225
1983
1-1-31
Ms. Carolyn S. Chambers
9-15-31/$79w
503-485-5611
Executive Vice President
and Treasurer
Liberty Communications, Inc.
P.O. Box 7009
Eugene, Oregon 97401
1984
1-1-82
79
SALT LAKE CITY BRANCH
Appointed by Federal Reserve Bank:
Term
expires
Dec. 31
Service
Began
Mr. Fred H. Stringham
12-19-26/$349m
801-973-5020
President
Valley Bank and Trust Company
2510 South State Street
South Salt Lake, Utah 84115
1982
1-1-78
Mr. Albert C. Gianoli
12-18-18/$8m
702-289-4441
President and
Chairman of the Board
First National Bank of Ely
P.O. Box 479
Ely, Nevada 89301
1983
1-1-81
Mr. Spencer F. Ecdes
8-24-34/$3.6b
801-350-5329
President and
Chief Executive Officer
First Security Corporation
P.O. Box 30006
Salt Lake City, Utah 84125
1984
4-30-80
Mrs. Lei a M. Ence
9-19-27/22,000 Students
801-581-6995
Executive Director
1984
University of Utah Alumni Association
155 South Central Campus Drive
Salt Lake City, Utah 84112
1-1-82
Seothermal Agr1/Aquacu1tur1st
White Arrow Ranch
Box 108
1982
1-1-78
Appointed by Board of Governors:
Mr. Robert A. ErMns
1-20-24/Not available
208-352-4460
Bliss, Idaho 83314
Mr. J . L. Terteling
l-25-37/$25m
208-376-6700
President
The Terteifng Company, Inc.
P.O. Box 4127
Boise, Idaho 83704
1983
1-1-78
Mr. Wendell J . Ashton
10-31-12/71,000 Circulation
801-237-2188
CHAIRMAN
Publisher
Deseret News
P.O. Box 1257
Salt Lake C1tyt Utah 84110
1984
1-1-79
80
SEATTLE BRANCH
. Term
expires
Dec. 31
Appointed by Federal Reserve Bank;
Service
Began
Mr. Donald L. Hellish
ll-l-27/$600m
907-265-2929
Chairman of the Board
National Bank of Alaska
P.O. Box 600
Anchorage, Alaska 99510
1982
1-1-78
Mr, Lonnie 6. Bailey
12-5-39/$50m
509-928-9600
Chief Operating Officer and
Executive Vice President
Fanners & Merchants Bank of
Rockford
N. 10 Argonne Road
Spokane, Washington 99206
1983
1-1-81
Mr. John N. Nordstrom
3-14-37/Not Available
206-628-2357
Co-chairman of the Board
Nordstrom, Inc.
1501 Fifth Avenue
Seattle, Washington 98101
1984
1-1-82
^r. 6. Robert Truex, Jr.
5-29-24/$5<n
Chairman
1984
1-1-82
Mr. Merle D. AdTurn
2-21-19/Not available
206-623-0733
President
1982
Puget Sound District Council
Harfti«e Trades Department, AFl/CIO
1501 Norton Building
Seattle, Washington 98104
1-1-78
Or. Virginia I . Parks
5-1-39/4,150 Students
206.626-6605
Vice President for Finance and
1983
1-1-78
1984
1-1-82
Rainier Bancorporation and
Ranier National Bank
P.O. Box 3966 T24-1
Seattle, Washington 98124
Appointed by Board of Governors:
Hr. John W. El11s
9-14-28/$450m
305-453-6731
CHAIRMAN
Treasurer
Seattle University
12th and Columbia
Seattle, Washington
98122
President and
Chief Executive Officer
Puget Sound Power i Light Company
Puget Power Building
Beilevoe, Washington 98009
81
Exhibit II
OCCUPATION CHARACTERISTICS OF
FEDERAL RESERVE BANK AND BRANCH DIRECTORS
(as o f August 198Z)
Occupational
Category
T.
Banking
Branches
Federal Reserve Banks
lota is
% of 277
No.
% of 108
No.
X o f 169
No.
36
33
73
43
109
39
7
30
11
?.
Manufacturing
19
18
li
3.
Education
9
8
19
n
28
10
4.
Agriculture
8
7
10
6
18
6
5.
Wholesale &
Retail Trade
7
6
6
4
13
5
10
4
6.
Services
3
3
7
4
7.
Professional
4
4
5
3
9
3
8.
Reai Estate &
Construction
7
6
7
4
14
5
Communications
2
2
4
2
6
2
10.
Non-Bank F i nancial
4
4
9
5
13
5
11.
labor and
Arbitration
1
1
3
2
4
\
9.
12.
Consumer & Civic
Representatives I
13.
Utilities
14.
Mining ft Extraction
1
)
5
3
6
2
15.
Transportsion
3
3
3
2
6
2
Ifi.
Unclassified
-
-
-
-
?7.
Vacancies
-
. -
Total*
*
3
108
1
5
3
2
TOO
NOTE: Totals may vary due to roundinc\.
3
.!
-
-
169
TOO
6
2
5
?
277
1001
REPRESENTATION BY WOMEN AND MINORITIES
ON BOARD OF DIRECTORS OF THE
FEDERAL RESERVE BANKS AND BRANCHES
(As of August, 1982)
federal Reserve Banks
Branches
Total
Bank Appointed
II
6
Total
.Board.Appointed
Total
19
HtnorUies
00
a. Blacks
10
b. Hispanics
3
c, Orientals
d, Native
Americans
2
Total Minorities
30
12
.15
83
REPRESENTATION BY WOMEN AND MINORITIES
ON BOARDS OF DIRECTORS OF THE
FEDERAL RESERVE BANKS AND BRANCHES
1975
1976
1977
1978
1979
1980
1981
£ 1
£
1982
£ *
t 1
£ 1
I I
£ 1
4
6
2%
17 6*
?3 8%
30 11% 30 1IX 28 10% 30 11%
55
2%
2%
66 2%
2%
7 3%
5
2%
7 3%
7 3X
5
1 -
1 -
1
Women
IX
1 1 •* 1
Hinonties
a. Blacks
*
b. Hispanics
c. On" en-
*
1
d. Native
American
•
2
13 5%
14
5%
5
2%
2%
1
13 5%
11 4%
5
2%
3 1%
2
1%
2 1%
t«lS
Total
Minorities *
BASE
269
13
26.9
1%
2 1%
5%
16 6%
15 5%
269
269
Information not available.
Percentages are rounded to Che nearest number
20
275
7t
2\
Si
20
275
It
16 6%
84
REPRESENTATION OF THRIFT INSTITUTIONS
ON BOARDS OF DIRECTORS OF THE
FEDERAL RESERVE BANKS AND BRANCHES
(As of August 1982)
Directors Whose Primary Occupations Are VIth Thrift Institutions
Federal Reserve Bank Boards
0
Branch Boards
5_
Total
Directors Otherwise Affiliated With Thrift
Federal Reserve Bank Boards
Branch Boards
Total
5
Institutions
1
6^
7
Chairman FAUNTROY. Pursuant to your suggestion, we will yield
now to Mr. Boykin for his statement.
Mr. NEAL. Would the chairman yield to me for a question.
My own interest is primarily in the interest of monetary policy
and the appropriateness of current monetary policy and so on. And
I am aware that we probably won't be able to meet beyond about
noon; is that not correct?
Chairman FAUNTROY. I will be able to continue until at least
12:30.
Mr. NEAL. I was just wondering if we might be able to focus a
little bit more on that than some of the other more technical questions. Or if it is your desire to move in another direction, I yield to
that.
I want to express my own opinion, if we could concentrate more
on that issue, that would be my desire.
Mr. PATMAN. Mr. Chairman, I wonder if we could go ahead and
have the questions now. We have all had an opportunity to read
the statements.
Chairman FAUNTROY. I am certainly appreciative of the sentiments expressed by both gentlemen. However, I would like to have
each president briefly summarize his statement. We will enter the
statements, in their entirety, in the record, and move quickly then
to questioning, as I am sure many members would want to do. Mr.
Boykin, and other members of the panel, feel free to go into whatever detail you think is required to get your points over.
85
STATEMENT OF ROBERT H. BOYKIN
Mr. BOYKIN. Thank you, Mr. Chairman. It is a pleasure to be
here for these hearings. I will try to be as brief as I can.
With respect to the community and scholarly activities in my
prepared statement, we have listed the efforts in our bank, in our
district, with regard to our work training program, upward mobility program, affirmative action policies, and community and scholarly activities. And while I will go over that material very hurriedly, and it is listed, I hope it is clear that we take this responsibility
very seriously, and we are dedicated in all of these areas. So, I
would not want it to be construed as passing over that lightly.
Beginning with some of the questions that relate more to the
economy, and turning to the question of liquidity first, of course
the cash flow positions of businesses throughout the country and
the 11th District are still showing some strain.
We have some of the cash flow problems obviously in the business sector. This is generating some earnings pressure in the financial sector. And, of course, earnings pressures in savings and loan
institutions resulting from the high funding costs remain a source
of concern. However, the commercial banking sector is relatively
liquid at this time. Business loan growth since July has moderated
and discount window borrowings have dropped off sharply in
recent months. In the 11th District weakness is primarily concentrated in the energy sector. Here we are talking about manufacturing energy equipment, drilling, and the energy servicing industry.
And similar to the national picture, high borrowing costs have increased liquidity pressures in small- to medium-sized firms, auto
dealerships, and residential homebuilders.
But even having said this, I think our part of the country seems
to be fareing a little better than other parts of the country. Our
financial institutions have been among the top performers during
the past several years. Implications for monetary policy of liquidity
strains in both the financial and business sectors are certainly
taken into consideration when setting policy. Recently both longand short-term interest rates have dropped sharply, and if this decline is sustained, it should significantly reduce liquidity strains
during the second half of this year.
Economic indicators seem to imply some improvement in the
economy in the near future. But we recognize at the present time
the economy still is rather weak.
The 11th District, of course, has been affected by the recession. I
have already referred to what is going on in the energy industry.
In addition to that, our district retailing is weaker than normal. In
our district, farmers are suffering from low prices. We have had
quite a bit of crop damage down our way. And we have had substantial loss of employment in the farming sector.
Although the inflationary rate abated in July, many of our Nation's economic problems are still tied to inflation and to inflationary expectations. Certainly high interest rates reflect investors'
fears of high inflation. The difficulties which have occurred this
year in the capital goods market, the housing market and to some
extent the automobile market, are legacies of past high inflation
rates and resulting high interest rates.
86
Consequently, the implications of the current state of the economy for monetary policy must be weighed carefully. While the current situation is serious, it is my view at least that any quick fix
that could be given by an expansionary monetary policy would
refuel inflation and the expectation of more inflation. Such a policy
would ultimately drive up interest rates and erode our economic
base even further. And this suggests that despite the current weakness of the economy, it is to the long-run benefit for everyone to
encourage an environment of stable prices so that productivity and
employment can expand.
We have learned a very painful lesson in this country about inflation, and if left unchecked, inflation will lead to high and volatile interest rates, increased uncertainty about the future economic
environment and reduced incentives for investment. Inflation ultimately contributes to inadequate productivity, living standards and
employment opportunities. This realization led the Federal Reserve
System to adopt a long-term program to slowly reduce the rate of
inflation. Much progress has been made: By almost any measure
the rate of inflation has been cut in half in the last several years.
Nevertheless, public skepticism regarding the permanence of this
progress, together with swelling Federal deficits, kept interest rates
high even while inflation was moderating. And this represented a
sharp increase in the so-called real, or inflation-adjusted, interest
rate that is the primary cause of current economic weakness.
Recently, however, the public has accepted some of the reductions in inflation as more permanent, fostering significant reduction in interest rates. And were we to relax our vigil against inflation, public expectations would reverse that decline. Consequently,
we feel our current policy provides the only hope for enduring
diminution of interest rates.
With respect to the monetary aggregates that the FOMC uses as
targets, I think they have been helpful. I think they will help guide
policies which will further reduce inflation, make possible economic recovery and sustainable growth. Nevertheless, structural
changes in our economy and our financial markets can affect patterns of monetary growth, and we must be willing to adjust our
growth targets, revise the definitions of our aggregates, or even
change the types of targets we use when evidence suggests this is
necessary.
For some years, with particular emphasis during the past 3
years, we have used the monetary and credit aggregates as targets.
Statistical studies over a number of years have shown that changes
in these aggregates are related to future changes in economic activity. Of special importance is the evidence that reduction in the
rates of growth of these aggregates will lead to reductions in the
rate of inflation. Experience in the last 3 years points out the importance of flexibility and judgment in using these aggregates. The
rapid pace of change of financial markets and temporary shifts in
the liquidity needs of firms and households have required us to deviate from our long-term targets from time to time. We must continue to reexamine the aggregates behavior and their relationship
with our economic goals as we set our long-term growth targets.
And in setting our short-term targets, we must continue to view
recent changes in money growth in the context of a whole host of
87
economic variables and indicators, to determine if short-run deviations from our targeting are appropriate.
In your letter of invitation, you mentioned alternative ways of
viewing monetary policy. One, the monetary base—quickly, I would
say that there are also problems with that. It does seem to me in
some work that has been done at our bank that there are probably
more problems with the monetary base than there are with the
monetary aggregates.
The use of interest rates is another frequently discussed alternative, but I think our unhappy experience with putting more emphasis on interest rates in the 1960's and 1970's is precisely what led
us to greater emphasis on the monetary aggregates 3 years ago.
Real interest rates have also been mentioned, and this, of course,
attempts to adjust nominal interest rates for the rate of inflation.
Unfortunately, the rate of inflation needed to make the adjustment
properly is the rate expected by borrowers and lenders over the life
of loans or deposits, and this number is unobservable.
The use of nominal GNP as an explicit target of Federal Reserve
policy has some appeal. A policy of limiting increases in this variable to those justified by long-term trends in labor force and productivity growth would insure our success in controlling inflation
without preventing the economic growth we strongly desire. The
disadvantage here is that the Federal Reserve has no direct control
over GNP, because GNP is affected not only by monetary policy,
but also by our Nation's budget and regulatory policies, international events and unanticipated domestic economic developments.
Recent attention has also been given to using a broad credit aggregate as a policy target. Again, this is something that cannot be
easily controlled by the Federal Reserve.
In concluding, Mr. Chairman, it is my judgment that our current
set of monetary targeting variables is the best of a very imperfect
set of possible choices. The search for better policy guides will and
should continue, but until they are found, careful and flexible use
of our current targets offers our greatest hope of reducing inflation
and providing the foundation for long-term growth.
Thank you.
[The prepared statement of Robert H. Boykin follows:]
88
Statement
of
Robert H. Boykin, President
Federal Reserve Bank of Dallas
before the
Subcommittee on Domestic Monetary
Policy of the Committee on Banking,
Finance and Urban Affairs
United States House of Representatives
September 23, 1982
89
Introduction
It is a pleasure to appear at this hearing to discuss the Activities
and Policies of the Federal Reserve Banks and their Implications for Monetary
Policy.
As you know, certain areas of your inquiries have been addressed in
the joint statement of the five Federal Reserve Bank Presidents who have been
called to appear. My responses to the issues not covered in the joint statement are as follows.
What has been your bank's involvement with community and scholarly
activities? In this connection, I would be pleased to know what
work-training programs, upward mobility programs, affirmative action
policies, forums for small and minority businesses, and research
activities your bank has been and is presently engaged in doing.
The following is a listing of the major activities of the Bank with
respect to community and scholarly activities:
Work-Training Programs
Computer-trainee program in conjunction with Skyline High School,
Dallas, Texas.
Summer intern programs with minority schools such as Bishop
College, Texas Southern University, and Prairie View A&M
University.
In-House training, including typing, shorthand, and word
processing classes.
Maintenance, electrical and equipment repair training in the
Facilities Department of the Bank.
Bank supported educational program offering full payment for
tuition and books for bank related/job related courses at
colleges in the area.
Upward Mobility Programs
Executive Development Program - emphasis on management development for potential managers and officers.
Executive Secretarial Program - emphasis on upward mobility for
clerical workers.
90
Administrative Assistant Program - emphasis on exposing new
college graduates to various areas of the Bank.
Career Ladder Establishment - a Bankwide program that establishes career paths in many areas of the organization.
Job Posting System - allows employees to bid for jobs in other
departments before outside recruiting begins.
Affirmative Action Policies
Recruits at minority colleges.
Advertises in minority newspapers and publications.
Establishes targets toward upward mobility for women and
minorities.
Seeks and encourages job applications from members of minority
groups.
Cooperates in educational programs with Texas Southern University
and Bishop College.
Staff members participate in community service activities,
particularly those designed to serve the needs of disadvantaged
members of the community.
Conducts In-House EEO awareness seminars.
Participates in career day at minority schools.
Two of our branches are heavy minority employers with minorities
representing half of their staffs. All of our offices have
excellent minority representation when compared to community
standards.
Community and Scholarly Activities
Conducts meetings on community reinvestment activities with
individuals and organizations throughout the Eleventh Federal
Reserve District.
Gives speeches on all aspects of Federal Reserve System activities.
Participates in activities with the Joint Council on Economic
Education, the Texas Council on Economic Education, and the
Educational Center for Economic Education at North Texas State
University.
Cooperates with universities in programs designed to enhance
economic education and to bring about an improved understanding
of monetary and economic policy.
91
Participates in community consumer educational fairs, activities,
and various other consumer education meetings.
Hosts meetings and participates in various activities that are
initiated to enhance small business financing and operational
needs.
Participates in the Volunteer Business Council.
Hosts meetings involving community leaders, bankers, businessmen,
and various other groups such as students and community organizations.
Provides support to community activities such as the annual United
Way Campaign, Wadley Blood Bank, and other community sponsored
programs designed to improve the conditions and environment of
all citizens.
The officers and staff of this Bank are members of, or are involved
in, the following organizations and activities:
American Economics Association
Dallas Economists Club
Advisory Council, East Texas State University, Bank Operations
Institute
Dallas Personnel Association
American Society of Personnel Administrators
Advisory Board, Texas A&M University Executive Development
Program
American Institute of Banking
Advisory Committee, Computer Science Cluster at Dallas
Independent School District
American Institute of Certified Accountants
Texas Society of Certified Public Accountants
State Bar of Texas
Dallas Bar Association
American Bar Association
Dallas Management Association
Junior Chamber of Commerce
Chamber of Commerce
American Statistical Association
Zonta Club of Dallas I
Bank Administration Institute
Dallas Agricultural Club
Dallas Council U.S. Navy League
Rotary International
Southwest Roundtable
Houston Personnel Association
American Agricultural Economics Association
Southwestern Social Science Association
Counselor, Southwest Graduate School of Banking, Southern
Methodist University
Lions International
92
Optimist International
Advisory Council, School of Management, University of Texas
at Dallas
Advisory Council, Center of Banking Education, Texas Southern
University
Advisory Council, Texas Tech School of Banking at Lubbock
The status of business and financial liquidity, in the economy as a
whole and in your District, and the implications for monetary policy.
Cash flow positions at businesses throughout the country and in the
Eleventh District are still showing some strain. Liquidity pressures at
small- to medium-sized firms have increased, as evidenced by the number of
bankruptcies reported. Cash flow problems among agricultural producers are
also evident. High and rising production costs, together with falling crop
and livestock prices, have significantly reduced net farm earnings, and the
number of forced farm sales is up.
Cash flow problems in the business sector have also generated
earnings pressures in the financial sector. Recent business and financial
failures, together with concerns about Mexican and other international credits,
have increased tension in U.S. financial markets. In recent months loan loss
provisions at commercial banks have been increased and more attention is being
given to problem loan areas. Earnings pressures at savings and loan institutions, resulting from high funding costs, remain a source of concern.
Lenders are exhibiting some preferences for quality credits and risk
premiums have increased in several sectors. In the commercial paper market,
the interest rate spread between the medium- and top-quality paper has widened.
The spread between CD rates and Treasury yields also widened temporarily
following recent bankruptcy announcements.
However, the commercial banking sector is relatively liquid at this
time. Business loan growth since July has moderated and discount window
93
borrowings have dropped off sharply in recent months. Similarly, in contrast
to 1974, access to the commercial paper and corporate bond markets has not
been closed to lower-rated borrowers. Both financial and nonfinancial firms
have been able to raise a substantial amount of funds in the credit markets
with most of the borrowing concentrated in the shorter maturity range.
In the Eleventh District, weakness is primarily concentrated in the
energy sector—manufacturing of energy equipment, drilling and energy servicing
industries. Moreover, similar to the national picture, high borrowing costs
have increased liquidity pressures at small- to medium-sized firms, particularly auto dealerships and residential home builders. However, despite the
weak energy sector, economic activity in our District is still relatively
strong compared to the rest of the country, and our major financial institutions have been among the top performers during the last several years.
Implications for monetary policy of liquidity strains in both the
financial and business sectors are taken into consideration when setting
policy. Recently, both long- and short-term interest rates have dropped
sharply and if this decline is sustained, it should significantly reduce
liquidity strains during the second half of this year.
Employment and business conditions in the economy, as a whole
and in your District, and the implications for monetary policy.
Economic indicators seem to imply some improvement in the economy in
the near future. The index of leading economic indicators has risen for four
consecutive months. In July, new factory orders rose at their highest rate
since December 1980. The biggest gain appeared in orders for nondefense
capital goods. Movements in that statistic often are indicative of future
changes in plant and equipment spending.
99-756 0—82
7
94
However, at the present time the economy still is rather weak. The
manufacturing sector in general, and capital goods manufacturing in particular, have been hit hard by the recession. Auto and home sales are slow. The
index of coincident economic indicators fell in June and again in July, and in
August the U.S. unemployment rate was at its highest level since 1941.
The Eleventh District has been hit by recession also. Last year,
growing weakness in some manufacturing sectors was more than offset by strength
in the energy industry. But the District economy started to show signs of
recession in the first quarter of 1982, when oil and gas drilling activity
. began to decline. Employment in a number of energy-related industries-including drilling, oil field equipment manufacture and primary metals--peaked
in March.
Devaluations of the Mexican peso in February and again in August
severely affected retail sales on the border and in San Antonio, one hundred
fifty miles away. As a result of the devaluations, and because of the sluggish economy, District retailing has been weak.
District farmers are suffering from low prices and crop damage.
Over the last two years, Texas farm employment has fallen by more than 10,000.
Low sales in the national housing markets have hurt the District's forest
products industry.
Although the inflation rate abated in July, many of our nation's
economic problems are still tied to inflation and to inflationary expectations.
Certainly, high interest rates reflect investor fears of high inflation. The
difficulties which have occurred this year in the capital goods markets, the
housing market and, to some extent, the automobile market, are legacies of
past high inflation rates and the resulting high interest rates.
95
Consequently, the implications of the current state of the economy
for monetary policy must be weighed carefully. While the current economic
situation is serious, any quick fix that could be given by an expansionary
monetary policy would refuel inflation and the expectation of more inflation.
Such a policy would ultimately drive up interest rates and erode our economic
base even further. This suggests that despite the current weakness of the
economy, it is to the long-run benefit for everyone to encourage an environment of stable prices in which productivity and employment can expand.
The relative importance of further reductions in inflation at this
time compared with the state of employment and business conditions
and liquidity.
We have learned a very painful lesson in this country about inflation.
If left unchecked, inflation will lead to high and volatile interest rates,
increased uncertainty about the future economic environment, and reduced
savings and investment. Through these channels, inflation ultimately contributes to inadequate growth in productivity, living standards, and employment
opportunities.
This realization led the Federal Reserve System to adopt a long-term
program to slowly reduce the rate of inflation. Much progress has been made:
by almost any measure the rate of inflation has been cut in half in the last
several years. Nevertheless, public skepticism regarding the permanence of
this progress, together with swelling Federal deficits, kept interest rates
high, even while inflation was moderating. This represented a sharp increase
in the so-called "real", or inflation-adjusted, interest rate, that is the
primary cause of current economic weakness.
Recently, however, the public has accepted some of the reduction in
inflation as more permanent, fostering significant reduction in interst rates.
96
Were we to relax our vigil against inflation, public expectations would reverse
that decline. Consequently, we feel our current policy provides the only hope
for enduring diminution of interest rates.
Although the choice of an appropriate short-run policy always involves
tradeoffs between competing objectives, the dilemmas are less troublesome now
that substantial progress has been made against inflation. Present monetary
growth targets can provide sufficient liquidity and credit for a sustainable
economic recovery, which is apparently under way. Yet these targets are, at
the same time, consistent with further reductions in inflation and interest
rates.
The appropriateness and viability of the monetary targets currently
used by the Federal Reserve, specifically the M-l aggregate, and your
views on alternative targets, including the monetary base, a credit
target, GNP, or targetting of real or nominal interest rates.
The monetary aggregates the FOMC uses as targets have helped and, I
believe, will help guide policies which will further reduce inflation and make
possible economic recovery and sustainable growth. Nevertheless, structural
changes in our economy and our financial markets can affect patterns of monetary growth, and we must be willing to adjust our growth targets, revise the
definitions of our aggregates, or even change the type of targets we use when
evidence suggests this is necessary.
For some years, with particular emphasis during the past three, we
have used the monetary and credit aggregates as targets. Statistical studies
over a number of years have shown that changes in these aggregates are related
to future changes in economic activity. Of special importance is the evidence
that reductions in the rates of growth of these aggregates will lead to reductions in the rate of inflation.
97
Tighter control of these aggregates over the last three years has
helped cut the inflation rate in half.
Further gradual reductions in the
rates of monetary growth will ensure further reductions in inflation.
But our
experience in the last three years points out the importance of flexibility
and judgment in using these aggregates.
The rapid pace of change in financial
markets and temporary shifts in the liquidity needs of firms and households
have required us to deviate from our long-term targets from time to time. We
must continue to reexamine the aggregates' behavior and their relationships
with our economic goals as we set our long-term growth targets.
And, in
setting our short-term targets, we must continue to view recent changes in
money growth in the context of a whole host of economic variables and indicators to determine if short-run deviations from our targets are appropriate.
Other strategies, based on alternative targets, appear less attractive.
Among those frequently mentioned is the monetary base.
Although the
concept—merely the sum of bank reserves and currency—appears simple, a
problem arises in adjusting the base for changes in reserve requirements.
If
reserve requirements are increased, for example, a higher amount of base is
necessary to support the same level of deposits and economic activity.
ferent adjustment procedures can yield
Dif-
substantially different results.
The base has several other deficiencies as well.
Like the money
aggregates, the base is affected by shifts among different types of deposits
such as those caused by the nationwide introduction of NOW accounts in 1981,
or shifts from bank deposits to money market mutual funds shares over a longer
period.
In addition, the economy's need for base money is also affected by
shifts in the public's demand for currency relative to bank deposits and
shifts in deposits among institutions with different reserve requirements.
98
Direct control of interest rates is another frequently discussed
alternative. However, our unhappy experience with putting more emphasis on
interest rates in the '60s and '70s is precisely what led us to greater
emphasis on the monetary aggregates three years ago. When inflation is accelerating, small rises in interest rates are unlikely to slow it down. It has
been possible for interest rates to rise over a long period of time and yet
have inflation accelerate as well, which renders nominal interest rates of
little value in guiding monetary policy.
Real interest rates, which attempt to adjust nominal interest rates
for the rate of inflation, appear to be an improvement. Unfortunately, the
rate of inflation needed to make the adjustment properly is the rate expected
by borrowers and lenders over the life of the loans or deposits on which the
interest will be paid. This number is unobservable, so the true real interest
rates are, to some extent, a matter of conjecture. Furthermore, many factors
can be expected to change the relationships between real interest rates and
other economic variables. Changes in the rate of inflation, tax structure,
productivity of our capital stock, and size of Federal budget deficits all
alter the level of the real interest rate which would best help us achieve our
goals. Research done at our Bank indicates that the relationship between real
interest rates and the level of business activities, while significant, is
highly variable and undependable.
The use of nominal 6NP as an explicit target of Federal Reserve
policy has some appeal. A policy of limiting increases in this variable to
those justified by long-term trends in labor force and productivity growth
would ensure our success in controlling inflation without preventing the
economic growth we strongly desire. The disadvantage is that the Federal
Reserve has no direct control over GNP. GNP is affected not only by monetary
99
policy, but also by our nation's budget and regulatory policies, international
events, and unanticipated domestic economic developments.
Because of the long
lags involved in monetary policy, current policy decisions cannot be based on
GNP behavior of the recent past but rather would have to be based on expected
GNP behavior in the distant future.
Such a policy strategy would require
highly accurate forecasts of the future course of our economy--as yet, economic science has not progressed enough to provide us with such forecasts.
Recent attention has also been given to using a broad credit aggregate as a policy target.
While such aggregates are closely related to GNP, i t
currently takes several months to compile the data necessary to compute them.
Also, as is the case with GNP, broad credit aggregates cannot be easily
controlled by the Federal Reserve.
They are relatively insensitive in the
short run to changes in either bank reserves or market interest rates.
We do
currently use a credit aggregate, bank credit, as one of our target variables.
Because i t is restricted to banks which are required to keep reserves, i t
falls much more closely under our control.
In my judgement, our current set of monetary target variables is the
best of a very imperfect set of possible choices.
The search for better
policy guides will and should continue, but, until they are found, careful and
flexible use of our current targets offers our greatest hope of reducing
inflation and providing the foundation for long-term growth.
100
Chairman FAUNTROY. Gentlemen, our members are chafing at
the bit to get into a dialog with you. For that reason, may I respectfully suggest, Mr. Corrigan, Mr. Roos, Mr. Solomon, and Mr.
Morris enter your statements in their entirety in the record at this
point, and we will immediately begin the questioning on the part of
the members.
[The prepared statements of E. Gerald Corrigan, Lawrence K.
Roos, Anthony M. Solomon, and Frank E. Morris follow:]
101
Statement by
E. Gerald Corrigan
President
Federal Reserve Bank of Minneapolis
Before the
U.S. House of Representatives
Subcommittee on Domestic Monetary Policy
September 23, 1982
102
Mr. Chairman, members of the Subcommittee, I appreciate this opportunity
to testify before the House Subcommittee on Domestic Monetary Policy. In addition to
the joint statement submitted by the five presidents, I would like to comment on the
several questions you have raised that relate more directly to the Federal Reserve Bank
of Minneapolis.
The first of these questions concerns the Minneapolis Fed's involvement
with community and scholarly activities and its efforts and programs in the area of
affirmative action.
Our community involvement activities can be grouped in three broad categories: education, communications, and corporate responsibility. I have attached, for
the record, a summary of such efforts, and will briefly describe highlights of our programs.
Our economic education programs reflect the philosophy that by providing
materials and assistance that fill curriculum gaps and by focusing on teacher training
programs, we can serve the greatest number of people at the lowest cost. Examples of
these efforts include providing staff to elementary schools to assist teachers in developing materials on economic issues generally and on the role of the Federal Reserve particularly and providing teacher training in economics for educators involved in a program
for high-potential elementary students.
One of our most significant curriculum projects was the development of an
instructional unit on consumer credit. The curriculum materials in this unit are being
used in community/adult education programs and in high schools throughout the country,
with more than 3,500 units distributed to date. I should add that all of our economic
education efforts are closely coordinated with the State Councils on Economic Education. In addition, I am a trustee of the Joint Council on Economic Education.
Another important curriculum material developed by the Bank has been
"YouVe the Banker," a simulation game designed to acquaint students and adults with the
103
basic economic principles related to money and banking. We are currently extending use
of "You're the Banker" from a board game to use as a computer simulation game.
In the area of communications, we have made special efforts to reach three
groups: depository institutions, agricultural and small business groups, and the business
community generally.
Communication efforts directed at these groups take several
forms. In 1981, Minneapolis Fed personnel gave over 180 speeches to banking, business,
construction, labor, agricultural, educational and service groups throughout the six states
in our district. We have also held a series of seminars around the state of Minnesota on
issues related primarily to agricultural finance, and we have provided program and administrative support to a district organization concerned with agricultural credit. One of
our most significant recent initiatives was the development and presentation of a seminar on economic issues for small business representatives from the district. More generally, we have defined as an important objective the development of working ties between
the Small Business Administration, the Minnesota Commission on Small Business and the
Task Force on Small Business and Economic Stability. From my experience with these
programs I would suggest that their value lies not simply in the information we impart
but, as important, the information, attitudes and concerns that we receive from these
diverse sources.
We meet our corporate responsibilities through two broad functions. First,
we try to participate fully—while acknowledging the special constraints imposed on a
Federal Reserve Bank—in community-based programs. This participation includes a role
within the Minority Business Opportunity Committee; providing staff to the local chapter
of the National Alliance of Businessmen for a program that identifies summer jobs for
minority youth; board membership on the Minnesota Project, a center for public policy
study and community development; active involvement—in terms of staff assistance and
solicitations—with the United Way of Minneapolis; and support services to the Minnesota
Special Olympics.
104
Second, we try to initiate and support programs that are consistent with
our overall responsibilities and that address specific community needs. Examples of
these programs include a joint education program we have undertaken in cooperation
with the Minneapolis Urban League to provide community residents with practical and
useful skills to cope with individual and family finances.
This "Personal Economic
Management Workshop" includes information on budgeting, borrowing, debt repayment,
and tax preparation. Our Consumer Affairs office has, in cooperation with the FDIC,
provided staff assistance to help financial institutions and local groups in a district
community develop a community reinvestment program.
One such program has been
completed and another is planned for the near future.
In a similar vein, and in cooperation with other agencies and educational
institutions, we arranged for conferences and special studies related to economic development issues on Indian reservations in the district. A final example of efforts to match
our particular expertise with community need would be educational programs and briefings on economic conditions that we have provided to the Metropolitan Economic
Development Council, a group formed to provide support to minority businesses.
You also raised, Mr. Chairman, specific questions regarding work-training
programs, upward mobility programs and affirmative action policies.
The Federal Reserve Bank of Minneapolis has, long before my tenure as
president, had a strong commitment to an effective affirmative action program. On an
annual basis, we prepare, monitor, and update an affirmative action plan that sets our
objectives for increasing the representation of women and minorities in the Bank in
general and particularly in professional positions.
I do not believe, however, that numbers are necessarily a good measure of
the actual effectiveness of an affirmative action program. To my mind, the real test of
successful affirmative action is to create an environment in which targeted groups are a
functioning, contributing force within the organization. This points to the need for a
105
range of initiatives in areas including recruitment, placement and training of minorities
and other protected classes.
We also have an active program for the handicapped. There are four objectives in that program: eliminating physical and attitudinal barriers, expanding employment and advancement opportunities, providing job-related programs and services, and
supporting community efforts to expand employment for the handicapped.
The research program at the Federal Reserve Bank of Minneapolis is a
balanced effort aimed at making meaningful contributions in three broad areas: first,
macroeconomic research, with an emphasis on issues related to public policy; second,
regional and national issues related to the evolving financial structure; and third, regional economic issues with particular emphasis on agriculture.
While our research staff is small, it has made and continues to make important contributions in each of these areas, including frequent contributions to scholarly
journals. Also, in the past year, one of our economists was on leave to a major university
and two members of the research staff were on leave to the staff of the U.S. Senate
Budget Committee.
Similarly, when consistent with our public responsibilities, our
research staff has participated on special commissions and studies related to state and
local government policy issues here in the Ninth District.
Given the thrust and reputation of the Bank's research program, it is not
surprising that we have maintained close relations with the district's academic community and particularly the University of Minnesota. We have also, through contract arrangements, made use of academic advisors to our research work.
I would like now to respond briefly to the questions you raised in four
policy-related areas:
the liquidity position of nonfinancial and financial businesses;
employment and business conditions; the trade-offs between further reductions in inflation and improvements in business conditions; and, finally, the appropriateness and viability of the monetary targets currently used by the Federal Reserve.
106
On a nationwide basis, the liquidity of nonfinancial businesses is at historically low levels by most standards. While some of the decline in business liquidity in
recent years may reflect growing sophistication in corporate financial and cash management techniques, it is clear that much of the recent slippage in corporate liquidity reflects patterns of economic performance we have witnessed over the last several years.
For example, the long period of essentially escalating inflation experienced
over the past decade or more made borrowing and leveraging very tempting because it
was so easy to paper over mistakes with successively higher product prices. To make
matters worse, the high levels of interest rates that inevitably accompany the inflationary process effectively closed down our long-term capital and equity markets for many
borrowers. Thus, increasingly, the debt incurred in recent years has been of the shortterm variety. For this reason, reopening and keeping open our long-term capital markets
and our equity markets must remain one of the central goals of economic policy generally and monetary policy specifically. In my judgment, this goal can best be realized (or
perhaps can only be realized) in the context of policies that get inflation down and keep
it down.
While it is difficult to find meaningful statistics that focus exclusively on
the liquidity situation of business firms located in the Ninth Federal Reserve District, I
have no reason to believe the situation in the Upper Midwest is materially different than
it is in the nation as a whole. It is possible—given the nature of some of the major business firms in the Twin Cities area—that in the nonfarm sector things may be a shade
better than is suggested by the national statistics. However, when allowance is made for
conditions in the farm sector—which has a very substantial presence in the Ninth District—the overall nonfinancial business liquidity situation in the district is not likely to
differ from the national picture.
The situation with respect to the liquidity of financial firms—banks in
particular—is a little more difficult to read. For example, in the Ninth Federal Reserve
107
District, certain conventional measures of bank liquidity—such as loan-to-deposit ratios
and liquid asset ratios—suggest that bank liquidity is generally satisfactory. However, on
closer inspection, it would appear that at least some of that statistical evidence reflects
curtailed levels of borrowing growing out of overall economic conditions—particularly in
the farm sector. It is also true in the Ninth District—as for the nation as a whole—that
recent months have seen a deterioration in the quality of credit, as heavy debt burdens in
combination with general economic conditions have cut into the net cash flow and profit
positions of many firms.
Any discussion of liquidity trends would not be complete without adding a
word or two about consumer liquidity, where there are some signs of improvement. For
example, there is now a smattering of evidence to suggest that consumer saving rates
have risen somewhat. Similarly, the rate at which the consumer sector has taken on new
debt has diminished over the past few years. These developments, in combination, have
strengthened the liquidity position of the consumer and, in the aggregate, augur well for
some step-up in spending.
Turning now to employment and business conditions more generally, I would
characterize current conditions for the nation and for the Ninth District as about flat. In
recent months there have been some scattered signs—some straws in the wind—to suggest that overall economic activity and employment might be picking up a bit, but hard
evidence of a generalized recovery is not yet available. When that evidence is at hand, I
expect we will see a recovery which, in its early stages, is modest in strength and driven
largely by consumer spending. The durability and sustainability of the recovery, and thus
its capacity to encompass other sectors of the economy, will depend importantly on our
ability to make and sustain further progress on the inflation front and to avoid another
resurgence of strains and pressures in financial markets stemming from the combination
of private and public credit demands.
108
Having said earlier that I do not perceive any major overall differences in
business conditions and employment in the Ninth Federal Reserve District relative to the
economy as a whole, let me make two qualifications to that statement. First, on balance
I believe it is fair to say that the Ninth Federal Reserve District may have fared somewhat better than the nation as a whole in this recent recessionary period. Certainly,
comparative unemployment rates would suggest that conclusion. For example, during the
second quarter of 1982, unemployment for the district as a whole averaged 7.3 percent,
sharply below the national average. The second qualification I would make is that these
overall statistics mask some serious specific problems. Agriculture is one, but in addition there are geographic pockets within the Ninth District where sharp declines in the
production of wood products and copper and iron ore, have produced very high levels of
unemployment and economic distress. More recently, the coal, oil and natural gas producing belts within the district have also been adversely affected by the worldwide
conditions in the energy and related industries.
These circumstances lead quite naturally to your next question regarding
the trade-offs between economic conditions and controlling inflation. In my judgment, it
is important to bear in mind, that in the current circumstances, further reductions in
inflation can and should go hand-in-hand with improvement in employment, business
activity, and liquidity. But, even over the longer term, the economic choices we face do
not involve either/or decisions. What is before us is a package deal: if we want to
improve the employment picture, increase liquidity, and create the right environment for
lasting and healthy business growth, we have to make further and sustained progress
against inflation. To be sure, there has been meaningful and encouraging progress on the
inflation side, as evidenced by the widespread deceleration in both price and wage increases that has already occurred. But we are by no means "home free" on the inflation
front—a proposition that in my view is underscored by the still-high level of long-term
interest rates prevailing in our financial markets. Such rates suggest to me, and suggest
109
rather strongly and directly, that investors are not yet convinced that progress against
inflation will be extended or, indeed, even maintained.
If my reading of the message in long-term interest rates is correct, then it
follows that improvement in employment, and in economic performance more generally,
requires further progress on the inflation side. For, as long as long-term interest rates,
girded by stubbornly persistent inflationary expectations, remain high, recovery in the
interest sensitive sectors of our economy—homebuilding, autos, other consumer durables,
business captial spending—may be sluggish and short-lived. In short, I doubt that we can
have the kind of recovery we desire over time without the full participation of these
sectors—participation that over time will depend upon lower long-term interest rates.
More broadly, I would maintain that the economic history of the past 15
years or so has demonstrated rather unmistakably that perceptions about trade-offs
between inflation and unemployment—while seductive and perhaps relevant in the short
run—were misplaced; inflation and true economic prosperity are fundamentally in conflict. If we want to regain our economic health—and I know that this is not an issue of
debate—then it is essential to bring inflation down and keep it down. Only through this
channel can we, in my opinion, reestablish the lower interest rates so critical to a broad,
durable, and sustainable expansion in our economy. Fortunately, I sense that we are now
in a position in which we can have economic recovery and further progress in winding
down inflation. Maintaining that condition will, however, require persistent discipline on
the part of both monetary and fiscal policy.
Finally, let me respond to your question regarding the current monetary
targets. Admittedly, monetary aggregate targets have limitations. We do not always
fully understand, for example, the factors contributing to short-run, week-to-week or
even month-to-month fluctuations in aggregates. And we are aware that, over longer
periods, the full range of money supply measures are influenced and affected by innovations in financial instruments and practices, as well as by monetary policy and financial
99-756 0—82
8
110
and economic developments. All of these forces, and others, can at times make it difficult both to predict and to interpret trends in money growth.
But recognizing that the aggregates have some problems does not imply, in
my judgment, that they ought to be abandoned as policy targets. Indeed, I am satisfied
that they are more than adequate guides for policy, given our current institutional and
operating arrangements. The problems that I alluded to earlier do suggest, though, the
necessity of applying experience, judgment, and old fashioned "common sense" in establishing, and then trying to achieve, specific monetary targets. They point out the continuing virtue of closely following several rather than a single aggregate such as Ml—both because a particular measure may, from time to time, be influenced by transitory
forces and because there is, in any event, potentially valuable policy information contained in the broader aggregates.
Innovations in payment practices may, at some point in the future, raise
sufficiently serious questions of definition, measurement, and control of the monetary
aggregates that alternative policy targets and techniques will have to be considered.
However, that day is not here. Having said that, let me add that the alternative targets
that have been proffered have serious shortcomings in their own right. While I do not
want to repeat the complete litany here, I would simply suggest that the other potential
policy targets frequently mentioned—real or nominal interest rates, the monetary base,
and so on—will not yield magical solutions to our economic problems. And, while one
particular target may have certain technical advantages over another, even those technical advantages have to be weighed against each other. And, at least to date, I am
satisfied that the weight of the evidence still points to the wisdom of sticking with the
family of monetary aggregates—with particular emphasis on Ml— as the primary guide
for monetary policy. That is not to suggest that we can be, should be or, in fact, are
indifferent to other considerations in the short run. Nor is it to say that I cannot conceive of conditions and circumstances which might lead me to a different view. However, it is to say that balanced and judicious use of the aggregates is operationally and
intellectually the best game in town for contemporary monetary policy. And to repeat
myself, the use of an alternative target will not eradicate the hard choices we face nor
would it eliminate the need for the persistent discipline in our financial policies that is
essential to sustained economic growth and prosperity.
Ill
Community Involvement Projects: Summary
1.
Urban League--joint education program
The League's overall program provides community residents with practical and useful
skills to help increase their interest in, and skills to cope with, the current economic
situation. The Personal Economic Management Workshop Series includes:
Budgeting
Borrowing
Debt repayment
Tax preparation and other topics.
2.
Neighborhood Housing Services
Neighborhood Housing Services (NHS) programs are designed to stimulate reinvestment in neighborhoods. The service is based on a partnership of financial institutions,
community residents, and local government. The Bank hosts luncheons to enable the
NHS staff to report to their supporters and solicit new support.
-*•
Indian Economic Development Programs
A series of studies was designed to provide the following planning and management
tools in a reservation setting:
Resource identity
Management techniques
Threshhold analysis, economic base study
Linear programming
Three conferences and four special studies were generated in cooperation with other
agencies and educational institutions.
4.
Metropolitan Economic Development Council
The Bank has assisted MEDA, a minority business development advocate, by supporting internal growth through educational programs, training, and briefings on current
economic conditions. (See also Memberships, Minority Purchasing Council.)
5.
Food and Agricultural Policy Seminars, co-sponsor, University of Minnesota
A series of seminars was held around the state of Minnesota on issues important to
agricultural interests in the Ninth District. Most were related to agricultural
finance. The Bank helped bring in speakers and provided other resources to maximize
the value of the seminars for participants.
6.
Opportunity Workshop
When projects of an appropriate nature arise, e.g., assembling media catalogs, the
Bank uses Opportunity Workshop, a sheltered workshop in Minneapolis.
112
7.
Community Resource Volunteers Program
The Bank provides resource people to elementary classrooms to assist teachers in
planning and teaching about forms of money and the Fed's role in an efficient
payments mechanism.
8.
Omnibus (A program for high-potential elementary students)
The Bank has provided training sessions for volunteers teaching special units in
economics to Omnibus students.
9.
Business Community Resource Volunteer Program
Bank staff members serve as resource people who participate in career discussions
with senior high school students.
10.
Twin Cities Opportunity Industrial Center
The center retrains hard-to-employ adults for entry into the labor market. The Bank
has provided resource people for classes and seminars in connection with training
programs.
1 i.
Consumer Education Unit
An instructional unit on consumer credit development has been developed in conjunction with educators and representatives of the credit industry. The unit is to be used
in the teaching of consumer credit concepts and skills in schools, community/adult
education programs, and other similar programs.
12.
State Councils for Economic Education
In cooperation with State Councils in the Ninth District states, the Bank provides a
variety of resources in setting up educational programs and seminars for teachers,
e.g., our teacher-banker workshops. Council programs are then developed and aimed
at teachers and students. This represents a major involvement by Bank.
13.
Tours
Tours are available to the public and to special groups upon request. In 1981 and
1982, groups have included in addition to school groups:
o
o
o
o
o
o
o
14.
business clubs,
senior citizens,
junior achievement classes,
farmers' groups,
Native American school groups,
AAUW and other women's groups, and
conventions, e.g., finance managers and agricultural economics professionals and
foreign visitors.
Northside Child Development Center
With other businesses, the Bank was involved in founding a child development center
in an urban area of Minneapolis.
113
15.
Upper Midwest Agricultural Credit Council (UMACC)
The Council is an organization of bank credit specialists that functions as an educational forum for bankers serving rural communities in the Upper Midwest. A Bank
staff person is executive secretary of UMACC, and the Office of Public Information
provides substantial administrative support.
16.
Upper Midwest Council
The Bank was a major supporter of the Council, a regional research group, until its
demise this year.
17.
Small Business Seminars, Initiatives
a.
White House Conference on Small Business
The Bank provided substantial planning, personnel, and adminstrative assistance
to state planning meetings leading up to the 1980 conference.
b.
Small Business Liaison
The Office of Public Information has, as a key objective, maintained close ties
with District (see Memberships, Participations) states' small business. This has
been accomplished, for example, through ties with the Small Business Administration, the Minnesota Commission on Small Business (attendance at annual and
regional meetings), and the Task Force on Small Business and Economic Stability
(organized by SBA to assist small firms with financial problems caused by high
money costs).
Examples of interaction with small business groups include:
18.
o
Small and minority business-sponsored meeting on the effects of economic
policy in March 1982 (Corrigan and staff),
o
Meetings with small and minority business groups in November 1981
(Corrigan), and
o
Meeting with the Task Force on Small Business and Economic Stability for
discussion of credit and monetary policy in August 1980.
Minnesota Special Olympics
The Bank provides support services for the Minnesota Special Olympics, thus allowing
Special Olympics to devote more of its resources to programming.
19.
Support for the Arts
a.
Purchases
The Bank purchases for its collection the works of regional artists and has made
an effort to include works by minority and women artists.
114
b.
Exhibitions
A program of temporary exhibitions has focused on Black artists (a Black History
Week event) and plans to highlight the Southeast Asian community (Hmong
tapestries) and correctional facilities inmates (Arts in Corrections) in upcoming
months.
20.
United Way of Minneapolis Area
The Bank provides substantial support to the annual United Way campaign. Each year
a staff member, who remains on salary at the Bank, spends three to four months as a
United Way Loaned Executive. Bank departments provide members for solicitation
and administrative work, and the Bank holds rallies for employees on Bank time.
21.
You're the Banker
The simulation game, You're the Banker, was developed by the Bank to acquaint
players with the basic economic principles related to money and banking. The game,
in board and computer versions, is used to bring students, educators, and members of
the community in contact with the financial institutions. The game is generally
distributed to schools and banks at the cost of production.
22.
Community Catalyst Role
Presidents of the Bank have been instrumental in concluding a significant study on
future choices facing Minnesota (Commission on Minnesota Futures), initiating an
organization to support academicians studying regional issues (Mid-Continent
Regional Science Association), and arbitrating a major dispute between the University of Minnesota and black students (following the assassination of Martin Luther
King, Jr.).
23.
Community Reinvestment Act/Truth in Lending Activities
The Consumer Affairs Department provides educational services that include
speaking on regulatory issues, distribution of brochures and other materials produced
throughout the Federal Reserve System, and responding to consumers' telephone
inquiries.
The department has also provided a staff person for up to one week to help an
individual SMSA group develop a CRA program (in cooperation with FDIC). One
program has been completed and another is planned for the near future.
115
Memberships, Participations
Small Business Administration Advisory Committee Councii
One staff member serves as a member of the Council Board, which serves as an interface
between small business and the SBA. The Council recommends policies that will enable
SBA to better serve its constituency.
Minority Business Opportunity Committee, Federal Executive Board
Even though not a member of the Federal Executive Board, the Bank elected to participate fully in the Committee's work promoting the development of minority-owned
business, both because of our financial expertise and our commitment to minority business
development.
Minority Purchasing Council
The Council is a subgroup of the Metropolitan Economic Development Council, a minority
business development advocate. The Bank participates in the Minority Business Exchange,
the Council's trade fair, and attends the Council's annual meeting.
National Alliance of Businessmen
Each year since 1972, the Bank has loaned the local NAB chapter a senior staff person to
participate in a program that identifies summer jobs for minority youth.
The Minnesota Project, Board Membership
The Project is a center for public policy study and community development, with an
emphasis on the implications of public policy decisions for all strata of the state's communities.
Minnesota Charities Review Council, Board Membership
The Council oversees solicitation and allocation of donations by charitable organizations
operating within the state.
116
TESTIMONY OF
LAWRENCE K. ROOS
PRESIDENT
FEDERAL RESERVE BANK OF ST. LOUIS
BEFORE THE
SUBCOMMITTEE ON DOMESTIC MONETARY POLICY
OF THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
WASHINGTON, DC
SEPTEMBER 23, 1982
117
Question 3:
What has been your bank's involvement with community and scholarly
activities?
In this connection, I would be pleased to know what
work-training programs, upward mobility programs, affirmative action
policies, forums for small and minority businesses, and research
activities your bank has been and is presently engaged in doing?
The Federal Reserve Bank of St. Louis has maintained a
formal Affirmative Action Plan for the past 10 years. The plan
is designed to encourage women and minorities to apply for
positions particularly in the management, professional, and
technical fields such as administration, operations, data
processing, and bank examination. The results reflect that the
Bank has been able to maintain or increase the number of women
and minorities in upper grade levels during the past several
years while the total number of staff members has declined.
Achievement of the Bank's Affirmative Action Plan has been
supported by its accelerated commitment to the following
community work-training and scholar cooperative programs
consisting of 60 percent females and minorities:
American Institute of Banking Work Study Program
St. Louis University Cooperative Program
Southern Illinois University Cooperative Program
International Visiting Scholar Program
The Bank through its upward mobility programs has promoted
179 staff members of which 62 percent were females and 26
118
percent were minorities. Programs that we have found to be the
most successful include the:
District Management Development Program
System Management Development Program
Bank Job Posting Program
Bank Career Planning Program
Special entry level training programs
In addition, our Bank has participated in local community
activities involving forums, workshops, and special projects for
small and minority businesses. Our role in these activities is
to provide technical assistance in community reinvestment to
both the public and the banks. Those organizations with which
we have close contact are the:
Small Business Association
Neighborhood Housing Services of St. Louis
Community Development Commissioners of St. Louis and
St. Louis County
St. Louis Association of Community Organizations
The research activities of our Bank are primarily
concentrated in the area of monetary theory and policy. Among
the topics investigated are: relationships between money growth
and income, output and employment; relationships between fiscal
policy and economic activity; relationships between reserve
variables and money; impact of bank regulation on financial
markets; and studies in individual bank behavior.
The results of these studies are published in the Federal
Reserve Bank of St. Louis Review.
In addition, the Bank
publishes data on monetary, economic, agricultural, regional,
and international trends. The research staff participates
widely in teaching and disseminating information on monetary
policy in seminars at colleges and universities, as well as at
meetings of a great variety for local, national, and
international organizations.
119
Question It
The status of business and financial liquidity, in the economy as a
whole and in your District, and the implications for monetary policy.
Financial liquidity reflects simply the ability of
financial institutions to lend to prospective borrowers.
Financial institutions in our district do not appear to lack
loanable funds. Despite the increase in business bankruptcies
and some resultant losses to financial institutions in this
district, financial institutions are aggressively seeking new
borrowers and continuing their lines of credit with existing
borrowers. This is particularly true of smaller institutions
which sell their surplus funds in the federal funds market
because their loan demand is low compared to their available
loanable funds.
Business liquidity also reflects the ability of businesses
to borrow. There is evidence that financial institutions are
displaying increased selectivity in their lending activity
as they have become increasingly conscious of greater
non-repayment risk. Even though most large and visible
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business failures have been associated more with mismanagement
than with a general credit squeeze, financial institutions are
currently wary of making marginal loans, even at what might have
previously been considered reasonable interest rates.
Consequently, businesses that are perceived as being higher-risk
borrowers, either because of their product line or for other
factors, are finding funds to be less available at current
rates. In this sense, their liquidity has been impaired.
In summary, I see little evidence that credit flows are
overly restricted because of any significant lack of bank
reserves. Therefore, I do not believe that a more expansive
monetary policy would improve the liquidity of businesses that
now find themselves unable to borrow at current market rates.
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Question 2:
Employment and business conditions in the economy, as a whole and in
your District, and the implications for monetary policy.
In the 8th Federal Reserve District, business conditions
are "flat." Manufacturing activity has been declining, retail
sales in real terms are about on par with last year's. Service
industries, however, are expanding. Residential construction is
slightly above its postwar low, and commercial construction is
slowing from its all-time high. Although average agricultural
income in this district will be somewhat lower than last year,
the drop has not reached crisis proportions. Livestock growers
are enjoying excellent margins and grain growers expect a bumper
crop. Prices, however, will be lower. Hardest hit are the
approximately 2.5 percent of all farmers who bought land at
extremely high prices and have had to finance it at high
interest rates.
Unemployment in the district, on average, is similar to the
national level. Illinois, Indiana, Kentucky, Mississippi and
Tennessee have higher-than-national unemployment (in the 10 - 12
percent range); Missouri and Arkansas are lower (8.5 - 9.5
percent range).
For the economy as a whole, I expect output growth to be
slow for the remainder of the year. If money continues to grow
at a rate of 5 - 5-1/2 percent, economic activity should pick up
in the second or third quarter of 1983. This implies that there
will not be much improvement in unemployment until the middle of
1983.
122
I would like to point out, however, that while unemployment
figures are very high, total civilian employment as a percent of
population is also very high—almost as high as the percent
achieved at previous cyclical peaks. About 58 percent of the
population was employed in July 1982 as compared with 57 percent
in 1951, 58 percent in 1956, 1969 and 1973, and 60 percent in
1979. Each of these years was viewed as a full employment
period. Thus, current unemployment figures do not imply the
serious contraction in spending that similar statistics would
have implied in the past.
Regarding monetary policy, I have no doubt that a sharp
acceleration in money growth would produce a temporary increase
in output growth and a temporary decrease in unemployment. But
I would like to underscore the word "temporary." Because
economic decisionmakers have learned that inflation is related
to money growth, and that inflation is not easily eliminated,
markets now respond to monetary acceleration much more quickly
than they did in the past. This means that inflationary
expectations are formed very rapidly and that any boost in money
growth is quickly translated into higher prices and higher
interest rates. Thus, output and employment gains resulting
from monetary expansion would be short-lived and would lead
ultimately only to permanently higher inflation and higher
interest rates. I, therefore, believe that the best policy to
restore normal output growth and thereby reduce unemployment
would be to maintain Ml growth currently at 5.5 percent rate
(the top of the Federal Reserve's announced Ml growth target
range), deviate as little as possible from that figure, and
reduce Ml growth in the future by no more than one percent per
year.
123
Question 3:
The relative importance of further reductions in inflation at this
time compared with the state of employment and business conditions
and liquidity.
All the evidence that we have accumulated indicates that
the basic rate of inflation begins to decline about one or two
years after monetary growth is reduced.
For example, current
reductions in inflation are the result of the reduced monetary
growth since 1979. This implies that inflation will continue to
decline, or at least remain at current levels, for a year or so
irrespective of what we do at this time. But if we are
concerned with current interest rate levels, which are based on
inflationary expectations, a further gradual reduction in money
growth becomes important.
This is particularly true since our
evidence indicates that gradual and steady reduction in money
growth has yery little negative effect on output and
employment.
Thus, if we want to lower interest rate levels
without adverse effects on output and employment, a gradual and
steady reduction in money growth, which implies a continuing
slow reduction in inflation, is both feasible and desirable.
124
Question 4:
The appropriateness and viability of the monetary targets currently
used by the Federal Reserve, specifically the M-l aggregate, and
your views on alternative targets, including the monetary base, a
credit target, GNP, or targeting of real or nominal interest rates.
The goal of monetary policy is to affect economic activity
(GNP). Because the Federal Reserve can directly control only
the monetary base, any policy target--Ml, interest rates, or any
other, is simply a short-term indicator of what changes we can
expect to occur in GNP.
Targeting on either the monetary base or GNP alone would
mean that there would be no short-term indicator of policy
actions. As a result, we would incur both a loss of information
and a greater probability of errors that might easily compound
over time. Thus, it is generally preferable to target on some
variable that is predictably related both to the monetary base
and to GNP, and one that can be observed in the short run.
Using interest rates as targets brought us to the economic
disarray that prompted a change of emphasis towards monetary
aggregates in 1979. Interest rates as targets suffer from three
serious deficiencies: (1) The relationship between interest
rates and GNP is tenuous; (2) it is doubtful that monetary
authorities can control interest rates, even in the short run;
and (3) because interest rates are highly visible, there will
always be pressures on the monetary authority to try to
stabilize them at the cost of destabilizing economic activity as
125
a whole. For example, when GNP is increasing at a fast pace,
both credit demands and interest rates rise. Under such
circumstances, attempts to prevent an increase in interest rates
usually result in supplying additional credit and money, which
further stimulates GNP. Therefore, policy actions produce
exactly the opposite of what economic stabilization would
require. Similar procyclical actions typically occur when GNP
growth is falling and reserves are withdrawn to counter any
decline in interest rates.
Although a credit variable may be well correlated with GNP,
it is difficult, if not impossible, to control. In the absence
of direct credit controls and credit allocation by some
governmental agency, monetary authorities can influence only a
small part of total credit—only that part which arises out of
newly created reserves of financial institutions. I have
serious reservations about direct credit controls and doubt that
credit allocation would be acceptable to our society.
This leaves Ml which, despite financial innovations and
despite changes in economic behavior, has been reliably related
to the central bank's control variable—the monetary base—and
has reliably predicted movements in prices and output. This
does not mean that some other variable might not perform
better. I simply don't know of any that would do so. In the
absence of a better alternative, I would be extremely reluctant
to abandon Ml targeting and subject the economy to the greater
volatility and greater inflation dangers that would result.
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0-82-
126
Statement byAnthony M. Solomon
President, Federal Reserve Bank of New York
before the
Subcommittee on Domestic Monetary Policy
of the
Committee on Banking, Finance and Urban Affairs
United States House of Representatives
Washington, D. C.
September 23, 1982
127
Good morning, Mr. Chairman.
I am
Anthony Solomon, President of the Federal Reserve Bank
of New York, and I thank you for this opportunity to
contribute to your examination of the activities and
policies of the Federal Reserve district banks and their
implications for monetary policy.
After consulting with
the Subcommittee, Presidents Boykin, Corrigan, Morris,
Roos and I have submitted a joint statement addressing
some of your questions and areas of concern with respect
to the Reserve Banks collectively.
Therefore, in my
separate remarks today, I will present my own views and
those of the New York Reserve Bank regarding the following matters:
(1)
our Bank's involvement with community and
scholarly activities, including forums for
small and minority business and other members
of the community and our economic research
efforts;
(2)
our policies and practices in the area of
equal employment opportunity and affirmative
action, and related matters;
(3)
economic conditions in the economy as a whole
and in our District, including employment and
128
business liquidity and how they factor into
our thinking regarding inflation and monetary
policy; and
(4)
the appropriateness and viability of the
monetary targets being used, specifically Ml,
and the possible use of alternative measures.
For convenience, I will discuss these topics
in the order they are presented in your inquiry.
Community and Scholarly Activities
The Federal Reserve Bank of New York maintains
extensive links with consumer and community groups in
the District.
We are also committed to providing a full
range of informational and educational publications
concerning the work and objectives of the Federal Reserve
to general audiences as well as more detailed and
analytical publications aimed at professional and
scholarly audiences.
In order to inform the public about their
rights and responsibilities under consumer credit
legislation, we produce a large number of pamphlets,
including some in the Spanish language in recognition
of New York's sizeable Hispanic community.
We meet with
consumer groups to discuss common concerns and, when we
receive complaints from bank customers that might imply
a violation of the regulations, we investigate and
129
assure that an appropriate response is made to the
customer.
We also conduct educational seminars, some
of them in conjunction with the New York City Department
of Consumer Affairs and the Board of Education, for such
varied audiences as instructors of the Youth Opportunity
Program, counselors at the Budget and Consumer Credit
Counseling Services, school teachers of social studies
and members of the Harlem Consumer Education Council.
Thus far in 1982, we have held nine of these seminars.
We reach other audiences, too.
About once a
month I host a meeting for business and community leaders
in our District, where we exchange viewpoints on the current state of the economy.
Other senior officials of the
Bank hold similar meetings around the District, three
times a year.
We are aware of the importance of the Community
Reinvestment Act and have an active and ongoing contact
with groups, both private and governmental, whose major
focus is housing and urban lending.
This is in addition
to our statutory duty to monitor compliance by statechartered member banks, which we fulfill through the bank
examination process.
We also are responsive to inquiries we receive
from the general public.
In the first half of 1982, the
130
Public Information division in New York responded to
almost 100,000 inquiries.
Many of these involved our
role as fiscal agent for the Treasury, as people wanted
to know about government securities and how to buy and
sell them.
Other questions were about regulation or
the central bank services we perform, and we have prepared a number of educational booklets about the work
of the Federal Reserve that we send out on request.
Research and Scholarly Activities
Our research and scholarly activities are
quite extensive.
The primary publication outlet for
these efforts is our Quarterly Review, a widely read
journal of economics containing articles that range from
discussions of the regional economy to examinations of
money market instruments and monetary policy options.
To give you a complete picture of all the types of
matters covered in our Quarterly Review, I have submitted as an exhibit a listing of all of our articles
over the past few years.
We also make available a
variety of economic papers written by our research
staff.
We keep in close touch with the academic com-
munity and other economists.
We invite professors and
others to conduct seminars at the Bank and our economists
are frequently invited to lecture or conduct seminars
131
at universities and elsewhere.
In addition, we conduct
special seminars at the Bank for college teachers of
money and banking, and for members of international
organizations and foreign central banks.
The research activities at the Federal Reserve
Bank of New York are basically policy oriented—they are
geared to assist in the formulation of domestic and
international policies in the broadest sense.
A good
part of our research work is devoted to current analyses
of economic and financial developments in the United
States, in foreign economies and international markets,
and in our region.
At the national level, we follow very closely
innovative practices in the financial markets that
might affect the interpretation of the monetary aggregates,
the implementation of monetary policy, or the stability
of our economic and financial system.
We are concerned
with the implementation of monetary targets and with the
outlook for the Federal deficit.
Some of the issues we
have examined recently are the effects of tight shortrun control of money, the role of money market funds as
a substitute for money, and the relationship between
the Eurodollar market and domestic financial markets.
We are also very concerned about the prospects
for economic growth and inflation.
In that connection we
have recently studied the effect of the international
132
value of the dollar on exports and imports and on
domestic prices.
Internationally, we have examined other
nations1 fiscal and monetary policies and have looked
into their experiences with financial innovation.
We
have investigated their methods of implementing monetary policy and the effects of developments abroad on
U.S. economic growth and inflation.
We also analyze
the situation of the less-developed countries, with
particular focus on their balance of payments and
their international debt, and the economic and
financial position of the OPEC nations.
At the regional level, we have done a number
of studies of New York City's tax structure and have
examined regional economic growth and inflation
compared with that of the nation as a whole.
In
evaluating New York City's attractiveness as a place
to work and for employers to locate, we have looked
into such matters as the cost to businesses and
individuals of subway delays, and have started a
study of the costs of crime.
Equal Opportunity Policy
As an employer and member of the community,
the Federal Reserve Bank of New York is committed to
133
maintaining a work environment in which all individuals
receive equal treatment and equal opportunity without
regard to their race, color, religion, national origin,
sex, age, or handicap.
This commitment is an integral
aspect of our personnel management and employee
relations activities including recruitment, selection,
promotion, compensation, benefits, training and
education, and counseling.
Affirmative Action
Since the early 1970's the New York Reserve
Bank has conducted an Affirmative Action Program, which
is aimed at increasing the representation of minorities
and women in upper level salary grades and in our
official staff, primarily by promotion from within
the Bank.
In the aggregate, minorities and women are
well represented at our Bank, comprising 40 percent
and 55 percent of our total staff, respectively.
Each
year we review our targets and our progress in meeting
them, and set new goals for the current year.
In broad terms, our Affirmative Action Program
consists of four major efforts:
First—Establishing specific Affirmative
Action goals which are approved
by our Board of Directors;
134
Second—Developing detailed action plans
for recruitment and advancement
of minorities and women;
Third—Implementing or carrying out of
these action plans;
Fourth—Monitoring our results against
goals and reporting them to our
Directors.
We have a record of continuing progress
toward increasing our representation of minorities and
women in senior level jobs and in official positions.
Over the past five years minority representation in our
senior salary grades has improved from 12 percent in
1977 to 15.5 percent in 1982.
Women have increased
their representation in those grades from almost 19 percent in 1977 to 24 percent in 1982.
There were five
minority group members in our official ranks in 1977;
today we have eight, and our goal for 1982 is 10 (or
7.5 percent of our official staff).
There were 12 women
officers at the Bank in 1977; today there are 24, and
we intend to have 27 women officers (or 26 percent of
our official staff) by year-end.
Affirmative Action for the Handicapped
Since 1976, the Bank's Board of Directors has
approved an Affirmative Action Program for the Handicapped.
135
The Bank recruits handicapped individuals and insures
equal opportunity for all handicapped employees.
The
Bank has instituted programs designed to increase
supervisors1 awareness and understanding of the concerns of handicapped employees and has made alterations
to its physical plant to accommodate the disabled.
Bank-Sponsored Upward Mobility Programs
Over 40 in-Bank training programs are offered
each year to assist our employees in developing jobrelated skills and to prepare them for increased
responsibility.
Among the courses offered are English
as a second language, supervisory training, writing and
office skills, and management skills training.
In
addition, an equal employment opportunity awareness
program "Fair Play," is presented to supervisory
personnel.
Interview skills workshops are held to
improve employees1 interviewing skills and prepare
them for opportunities available through our job posting
system.
Most job openings at the Bank are filled
through the job posting system, which emphasizes equal
opportunity for all qualified applicants.
Counseling
is available to all employees to assist them in
reviewing career opportunities at the Bank and in
136
determining their qualifications for specific job
openings.
This summer, the Bank sponsored a Minority
Summer Internship Program.
This program provided
summer employment in professional positions to
minority college students interested in a career in
the banking industry.
The objective of the program
is to assist in the identification and recruitment
of qualified minority students about to enter the
marketplace.
The program was limited to college
juniors and seniors.
We feel it was highly success-
ful and plan to repeat it in 1983.
During the past years, we have increased
participation by minorities and women in our
Executive Training and Development Program, and the
Management Training Program.
These programs are
designed specifically to identify and develop promising
candidates for supervisory and managerial positions.
Special emphasis is placed on the following areas:
Seminars to help upwardly mobile
employees to objectively identify
their career aspirations and strengths;
Instruction in communication skills
(both written and oral) and confidence
building;
137
Increasing exposure to Federal Reserve
policies, procedures, projects, etc.
and
Development of interpersonal and
leadership skills to prepare the employee
to supervise others.
Community Involvement
The Bank supplements its internal affirmative
action efforts by participating in a variety of special
community action programs, and actively pursues new
opportunities to enhance its community involvement.
Some of these are as follows:
1.
National Urban League's Black Executive
Exchange Program (BEEP) —
A program in
which black businessmen and women from
a variety of fields lecture at predominantly black colleges and universities
to supplement classroom instruction,
acquaint students with a wide variety
of career opportunities, and provide
positive role identification.
2.
American Economic Association (AEA) Summer
Program for Minorities —
This program
is administered by AEA, hosted by Yale
University, and funded by the Sloan
138
Foundation, the AEA, the Board of
Governors of the Federal Reserve System
and a number of Federal Reserve Banks,
including the Federal Reserve Bank of
New York.
The objective of the program
is to identify promising prospective
minority Ph.D. candidates with the
necessary undergraduate training in
economic theory and analysis.
Open Housing Center —
An employer-sponsored
service which provides assistance in locating
housing in New York City for employees and
assists employees who feel they have been
discriminated against in locating suitable
housing.
Various New York City and New York State
Sponsored Programs
a. Youth Opportunity Campaign - A
program administed by the New York
State Employment Service which provides summer jobs for economically
disadvantaged high school and
college students.
139
k« School Work Exploratory Educational
Program (SWEEP) —
A workshop
sponsored by the New York City Board
of Education and the National Alliance
of businessmen to provide high school
students with exposure to a variety
of career opportunities through onthe-job observations.
On many occasions, our officers and employees
are asked to participate in business and career forums
sponsored by corporate and academic institutions.
To
give just two examples:
New York University and Citibank Business Career
Forum for Minority Students —
A program designed
to acquaint minority students with graduatelevel study in business and businessmen and
women who are also members of minority groups.
Minority Job Fair —
Sponsored by the
National Organization of Black University
and College Students held at Howard
University in Washington, D.C.
Finally, I should add that in the coming month,
we will become a member of the New York/New Jersey
Minority Purchasing Council, Inc. to enhance participation
140
by minority vendors in supplying goods and services to
the Bank.
Economic Conditions and Monetary Policy
The long-run goal of monetary policy is to
reduce inflationary pressures by gradually slowing the
growth of money to a rate consistent with noninflationary
expansion in business activity.
And the Federal Reserve
has been moving toward that goal.
Ml growth in 1979 was
less than in 1978, in 1980 less than in 1979, and in 1981
below 1980.
This slowing in money growth is now being
reflected in lower inflation rates and in expectations
of reduced inflationary pressures for some time to come.
The financial markets are becoming convinced of the
Federal Reserve's resolve on the inflation front.
Because inflationary psychology had become
deeply entrenched in economic decisions and expectations,
the reduction in inflation has been a painful process.
Profit margins have been squeezed, especially in those
firms that had bet on a continuation of inflation, and
unemployment is up sharply.
Nor have the effects been
even across all regions or sectors of the economy.
Homebuilding and the auto industry have been among the
hardest hit because of their sensitivity to the cost of
credit.
But hopefully the worst of the bad economic
141
news appears to be behind us, and we believe that the
Federal Reserve's monetary targets are sufficient to permit
economic growth in a noninflationary environment.
To
foster such growth, the FOMC has tentatively decided to
retain the 1982 targets for Ml growth for 1983.
While the Federal Reserve generally expresses
its long-term goals in terms of monetary targets,
particularly Ml growth, many other economic factors
are taken into consideration.
Broader measures of money
and liquidity as well as credit aggregates are monitored
by the Federal Reserve System.
i
In addition, the Federal
i
Reserve Bank of New #ork, like the other Reserve Banks,
keeps in touch with business conditions in its District
as well as national economic trends.
The New York Bank,
however, is unique in that it operates in the Government
securities market on behalf of the FOMC, as well as in
the foreign exchange markets.
Moreoever, the Second District contains the
world's foremost financial center.
Most dealers in
U.S. securities are located in New York City, many of
the nation's largest banks are headquartered there, and
more than half of the Treasury's securities are sold
through New York financial institutions.
As a result,
the New York Federal Reserve carefully follows developments in the national and international financial markets
and brings that perspective to FOMC meetings.
9-756 0—82
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142
In recent months, the strength and resiliency
of our financial markets have been tested by events
like the failures of Drysdale Government Securities and
Penn Square National Bank.
There is also market concern
about a number of domestic and international credits.
Appropriately/ reviews of market practices and credit
procedures are being undertaken which will ultimately
strengthen our financial system.
At the New York Reserve Bank, we have taken
a particularly active role in working to improve
practices in the Government securities market.
We
have also been closely involved with efforts to relieve
concerns in the international financial markets—notably
involving Mexico in recent weeks.
Along with a perspective on financial markets,
the New York Reserve Bank brings an overview of the
regional economy —
FOMC meetings.
one of the nation's largest —
to
Business conditions in the Second
District have deteriorated during the current recession,
but the decline has not been as severe as in other
parts of the nation.
Total employment in New York
State has not fallen nearly as much on a percentage
basis as it has for the nation as a whole.
143
In part, this is due to the concentration
in New York of financial and service industries which
tend to be less sensitive to business downturns.
Manufacturing employment, although declining sharply
in New York since last summer, has not fallen as much
as it has nationwide.
So while the recession has
affected New York, there are also reasons to be
optimistic about the ability of New York's economy
to withstand recessionary forces better than in the
past when New York's losses were considerably greater
than for the nation.
And at this juncture, there are also reasons
to be less pessimistic about the national outlook as
well.
Inflation rates are down, interest rates have
declined, and most of the inventory adjustment has
been completed.
Thus, while some questions remain about
the exact timing, the economy appears to be poised for
a period of modest business recovery —
a recovery that
will not be accompanied by a resurgence of inflationary
pressures as long as the Federal Reserve maintains its
monetary discipline and the Congress continues to work
toward a closer balancing of Federal receipts and
expenditures.
144
The Federal Reserve's commitment to monetary
discipline, however, should not be interpreted as
rigid adherence to monetary targets, particularly in
the short run.
The Federal Reserve is prepared to
allow money growth to be above or below target for
brief periods of time when the circumstances suggest
that special factors are coming into play.
In 1981,
the rapid growth of money market funds appeared to be
reducing Ml growth as consumers transferred part of
their transactions balances to money funds, and others
learned what a convenient mechanism money funds could
be for managing cash balances more efficiently.
Under
such circumstances, the Federal Reserve was willing to
tolerate below-target growth for a period of time.
In contrast, during 1982, special factors
seemed to be adding to Ml growth.
The sharp decline
in business activity late last year and early this year
prompted consumers to build up their precautionary
balances —
primarily in the form of NOW accounts and
savings deposits.
With Ml being raised by growth in
nontransaction deposits during late 1981 and early 1982,
the Federal Reserve felt that Ml growth around the top
of the annual range was acceptable.
145
The buildup in precautionary balances eased
in the second quarter of this year, but if economic
turbulence and uncertainty led again to stronger than
anticipated demands for money and liquidity, the FOMC
would tolerate growth somewhat in excess of the annual
range for a period of time.
The Federal Reserve would
look to a variety of factors in making such a decision,
including the behavior of different components of the
money supply, movements in velocity, and the condition
of banking and financial markets.
But we do not plan
to respond strongly to various "bulges" or "valleys"
in monetary growth at times when the demands for money
and liquidity may be exceptionally volatile.
The Federal Reserve will need to continue
its flexible approach to policy in the long run also
as the financial markets continue to change and new
ways are found to manage cash balances more efficiently.
Sweep accounts, NOW accounts, money funds, retail and
corporate RPs, and Eurodollars —
all have raised
enough questions in recent years about the usefulness
of Ml by itself as a guide to policy.
In summary, we have traveled a long way on
the road toward greater price stability and a healthy
foundation for sound economic expansion.
It would be
146
a tragic mistake not to finish the journey.
The
Federal Reserve remains firm in its anti-inflationary
stance, but flexible in its approach to policy, and
fully intends to aim for money growth consistent
with economic recovery in the years to come.
In that
sense, the Federal Reserve's Ml target, after allowance for normal velocity, can be viewed as effectively
setting a cap on nominal GNP growth.
As inflation
recedes, the monetary targets will automatically
permit more room for real economic growth.
And that
appears to be the stage of the process we are now
entering —
less inflation and more economic growth.
laaua
SuMtr 1980
Autumn 1980
Conttnti
Author
United States and the World Economy
Anthony H. Solomon
(speech)
Current developments
The buslneas situation
The financial markets
John Wenninger
Leonard C. Sahllng
Reforming New York City's Property Tax: Iaaues snd Options
Msrk A. Willis
Perspective on the United Ststes External Position
Since World War II
Stephen V.O. Clarke
The Pricing of Syndicated Eurocurrency
Laurie S* Goodman
Credits
Monetsry Policy and Open Market Operations in 1979
Peter D. Sternllght
Tressury and Federal Reserve Foreign Exchange Operations
(interim report)
Scott E. Pardaa
Financial Innovation in Canada
Laurie Landy
Current developments
The bualness situation
The financial markets
Harcoa Jonea
Leonard C. Sahllng
Recent Trends in the Federal Taxation of Individual
Increasing Personal Saving:
Income
Can Consumption Taxea Help?
Treasury snd Federsl Reserve Foreign Exchange Operations
(semiannual report)
Carl J. Palaah
Robert DeFlna
Scott E. Pardee
Contents
Issue
Winter 1980-81
Spring 1981
Author
In Hemoriaa: John Henry Williams 1887-1980
Stephen V.O. Clarke
Inflation and Stock Values: la Our Tax Structure the Villain?
Karcelle Arak
Cutting the Federal Budget:
Growth Can Be Reduced
James R. Capra
Analyzing How Faat Expenditure
Current developments
The buaineaa situation
The financial markets
Harcos Jones
John Partlan
Global Payments Problems: The Outlook for 1981
William J. Caaaer
Oil Price Decontrol and Beyond
Paul Bennett,
Harold Cole, Steven Dy
Social Security and Savings Behavior
Paul Wachtel
Treasury and Federal Reserve Foreign Exchange Operations
(interim report)
Scott E. Pardee
New York City's Economy in 1960
Rona B. Stein
The Economic Costs of Subway Deterioration
Daniel E. Chall
Current developments
The business situation
Highlights of the recent national income and
product account revisions
The financial markets
The Decline in Personal Saving
Steven Dym
Deborah Jatnroz
David Beek
Donald Cox
The LDC Debt Burden
David Roberts
Financial Innovation and Monetary Indicators in Japan
Dorothy B. Chrlstelov
Treasury and Federal Reserve Foreign Exchange Operations
(semiannual report)
Scott E. Pardee
Issue
S w M t 1981
Autumn 1981
Contents
Author
Recent Instability in the Demand for Honey
John Wenninger,
Lawrence Radeckl, and
Elltabeth Hammond
Bank Lending to Non-OPEC LDCs: Are Risks DiversIflableT
Laurie S. Coodman
The National Defense Budget and Its Economic Effects
James R. Capra
Current developments
The business situation
The financial markets
Paul Bennett
Marcos Jones
Bankers' Acceptances
William C. Melton,
Jean M. Mahr
International Diversification by United States Pension Funds
Edna E. Ehrllch
Excess Reserves and Reserve Targeting
David C. Beek
Current developments
The business situation
New York experiences renewed strength In personal income
The financial markets
Sharon P. Smith
Rona B. Stein and
Mark A. Willis
Marcos Jones
Evolution and Growth of the United States Foreign
Exchange Market
Patricia A. Revey
Treasury and Federal Reserve Foreign Exchange Operations
(semiannual report)
Sam Y. Cross
laaue
Vlnttr 1901-82
Spring 1982
Content*
Author
Innovation! In the Financial Markets
Marcelle Arak
Monetary Policy Without Regulation Q
Betsy Buttrlll White
Money Market Mutual Funda and Monetary Control
John C. Partlon, Michael Dotsey,
and Steven Englander
Original Issue Deep Discount Bonds
Andrew Silver
The SDR in Private International Finance
Dorothy Meadow Sobol
Leasing — A Financial Option for States and
Localities?
Mark A. Willis
Current econotilc developments
Leonard Snhllng
National Cas Controls and Decontrol
Paul Bennett, Deborah Kuenstner
Combining Decontrol of Natural Cas with a
New Tax on Producer Revenues
James R. Capra
David C. Beek
Short-run Monetary Control:
Some Possible Dangers
Lawrence Radeckl
An Analysis of
The Eurodollar Conundrum
Edward J. Frydl
Mortgage Designs, Inflation, and Real Interest
Rates
Marcos T. Jones
S
laaue
Summer 1982
Contents
Author
Dollar Appreciation, Foreign Trade, and the U.S. Econotry
Robert A. Feldman
Eurodollar Arbitrage
Lawrence L. Krelcher
The Coat of Capital} How High la It?
Patrick J. Corcoran
Leonard C. Sahllng
The Flrat Concurrent Resolution and the Budget Outlook
11
Impact of "Buy Downs on Affordablllty and Home Prices
New York'a Economic Performance
Foreign Banking In the United States: A Regulatory
and Supervisory Perspective
James R. Capra
Robin DeHaglatrla
William U. Creer
Ronn B. Stein
Edward M. Tepper
Mark A. Willis
Betsy Buttrill White
,_*
152
Statement by
Frank E. Morris
President, Federal Reserve Bank of Boston
before the
Subcommittee on Domestic Monetary Policy
of the
Committee on Banking, Finance and Urban Affairs
United States House of Representatives
Washington, D.C.
September 23, 1982
153
I am pleased to be able to participate in this Hearing.
The following are my responses to the questions posed by
Chairman Fauntroy which are not dealt with in our joint
statement.
What has been your bank's involvement with community and
scholarly activities? In this connection, I would be
pleased to know what work-training programs, upward
mobility programs, affirmative action policies, forms
for small and minority businesses, and research activities your bank has been and is presently engaged in doing.
Perhaps the most fundamental contribution of the Bank
to the region we serve is our research program on the
New England economy.
This program which absorbs a sizable
part of our research budget, has over the years led to the
Bank becoming known as a center for objective expertise
on New England economic problems.
Our regional research
staff routinely services requests for data and analysis
from New England Governors and Mayors.
They were actively
involved in the resolution of the financial crises of the
State of Massachusetts and the City of Boston.
We have cultivated close contacts with the New England
academic community.
Two prominent economists, James
Duesenberry of Harvard and Robert Solow of MIT, have
served as Chairmen of the Board of Directors of our Bank.
We solicit the views of a panel of prominent New England
economists prior to each FOMC meeting and transmit them
154
to the FOMC members as part of our contribution to the
Red Book.
We sponsor one or two conferences a year on
some topic of pressing interest.
These conferences have
served to strengthen the ties between the Bank and the
academic community.
In a conference to be given next
month on government policies to influence the savings rate,
we will have papers presented by faculty members from Harvard,
MIT and Yale, as well as by economists from outside the region.
The Bank is actively involved in efforts to resolve
the social, as well as the economic problems, of our
region.
I serve as chairman of the Tri-Lateral Council
for Quality Education, a business group which seeks to
improve the quality of the Boston School System.
I am
also Vice Chairman of the Boston Private Industry Council,
a member of the Advisory Council to the Coalition of
Northeast Governors and a member of the Coordinating
Committee (sometimes known as "The Vault"), which is a
business group concerned with the problems of the City of
Boston.
We encourage Bank officers to get involved in
community affairs.
Among other affiliations, our officers
are directors of the Neighborhood Housing Services, the
Massachusetts Higher Education Assistance Corporation
and the New England Education Loan Marketing Corporation.
As a member of the Tri-Lateral Council for Quality
Education, the Bank has entered into a partnership
arrangement with South Boston High School under which we
contribute to enriching the educational experience of the
155
students.
We also seek to prepare students for entry into
the world of work by counseling, teaching them how to participate in a job interview, and providing the experience of a
part-time or summer job.
Twenty-five students from the
South Boston High School worked in the Bank this summer.
The Bank operates a Skills Development Center in
which disadvantaged young people who do not meet our
minimum employment standards are taught clerical skills
and good work habits.
Seventy-eight trainees have
graduated from the program and have been placed in
permanent jobs, including sixty-six placements within
the Bank.
One graduate of the Skills Development Center
is now a computer programmer.
The Bank is a member of the New England Minority
Purchasing Council and, as part of our affirmative action
program, has an annual target for purchases from minority
vendors.
The status of business and financial liquidity, in
the economy as a whole and in your District, and the
implications for monetary policy.
The lack of economic growth during the past three
years, together with declining profitability and high
interest rates, has depressed business liquidity to a
record post-war low.
For nonfinancial corporations, the
debt-to-asset ratio now has reached 60%, well above the
customary 501 established in the late 1960s and 70s.
During the 1980s to date, about two-thirds of business
borrowing has been short term.
High leverage and high
156
interest rates have pushed the ratio of debt service charges
to cash flow above 50%, well above the 30% ratio that
prevailed during most of the 1970s.
A drop in the rate
of return on assets has been responsible for much of the
erosion in business liquidity.
The rate of return on
total nonfinancial corporate assets is only about twothirds of its level in the late 1960s and early 1970s.
While we have no direct estimates of regional business
liquidity, there is no reason to believe that conditions
in New England differ sharply from those nationally.
Nonetheless, we know of no major New England corporation
which is currently suffering a severe liquidity squeeze.
The major decline in interest rates of recent weeks has
undoubtedly helped to ease the situation of many firms
and the sharp rise in common stock prices should make it
feasible for some of them to strengthen their equity positions.
The commercial banks of New England are in good
condition, undoubtedly reflecting the relatively strong
performance of the New England economy.
While it is too
early in the game to form a final conclusion, my impression is that loan losses at New England commercial
banks, while showing a rising trend, may not be as
serious as the loan losses suffered in the 1974-75
recession.
The thrift institutions of New England are highly
liquid, reflecting very conservative asset management
since 1975.
We have seen very few forced mergers of
157
thrift institutions in New England, in large part
because their capital positions tend to be substantially
stronger than the thrift industry nationally.
The implication for monetary policy is that the
Federal Reserve must remain alert to evidence of any
generalized liquidity problem and to any development
which might threaten the viability of the financial markets.
Employment and business conditions in the economy,
as a whole and in your District, and the implications
for monetary policy.
The New England States have weathered the recession
relatively well.
Unemployment rates throughout most of
the region have been consistently below the national
average.
During the first six months of 1982, the
average unemployment rate in New England was 7.8 percent,
which compares with the U.S. figure of 9.1 percent.
Total
employment has tracked closely the national trend, despite
the loss of approximately 50,000 state and local government
jobs in Massachusetts attributable to Proposition 2%.
This relatively strong performance reflects the
transformation of the New England economy, with competitive high technology companies gradually replacing the
old-line industries.
Some of our high technology companies
have been adding to their employment rolls right through
the recession.
New England is also benefiting from the
upturn in defense procurement, which is cushioning, for
many companies, the decline in consumer demand for their products.
99-756 0 — 8 2
11
158
On the other hand, New England is heavily dependent
on capital goods production.
Many high technology
products are investment goods, and the region is still
active in machine tools and other more traditional capital
goods industries.
These companies have been living off
their order backlogs.
New orders are weak because of
high interest rates and the strength of the dollar on
the foreign exchange markets, which has made our exports
less competitive in world markets.
More than anything
else, these companies need public policies which will
reduce the cost of capital and render financially feasible
investments which have been shelved because of high cost
of money.
Policies which expand total demand without
bringing interest rates down are not going to meet the
needs of New England's capital goods producers.
The relative importance of further reductions in
inflation at this time compared with the state of
employment and business conditions and liquidity.
We are at a delicate juncture for monetary policy.
We must have a policy which provides a financial base
for a sustained upturn in economic activity while, at
the same time, providing assurance to the financial
markets that the Federal Reserve continues determined
to reduce the rate of inflation in the years ahead.
To
restore the economy to a healthy state, produce a substantial decline in the unemployment rate, and generate
the increases in productivity necessary to produce rising
159
real incomes for the people of the United States, we
must reduce the costs of capital for new investment.
A precondition for a healthy economy is a healthy bond
and stock market.
To generate a healthy bond and stock
market, we must convince the investor that the inflation
rate is going to continue to decline in the years ahead.
This is why inflation control must not take a back seat
to any other policy objective.
Disinflation is a painful business. We have paid a
heavy price for the gains we have made thus far, but the
gains are real and critically important.
The inflation
rate is down substantially, we have seen a surprisingly
large decline in the rate of advance in wages and
salaries and there is evidence of fundamental changes
which will show up in sizable productivity gains as
the economy turns up.
We have begun to lay the found-
ation for a strong economy for the balance of the 1980s.
Yet these developments are viewed with a heavy
layer of skepticism by many players in the investment
markets.
They saw the inflation rate decline and wage
rate increases decelerate in the wake of the 1974-75
recession, but it proved to be purely a cyclical phenomenon.
Because we were unwilling then to continue to
give high priority to inflation control coming out of
the 1974-75 recession, the gains won at such heavy cost
soon evaporated and we moved quickly back to staglation-with high unemployment and double digit inflation.
160
After the 1974-75 recession business liquidity improved
only superficially.
During the late 1970s, rising inflation
eroded business profitability while inevitably increasing
the cost of long-term financing.
As a result of this
experience, I believe that a steady reduction of inflation
is a precondition for sustaining growth and attaining
acceptable levels of employment and business liquidity in
the 1980s.
We should learn from the experience following the
1974-75 recession, but many in the financial markets are
not sure that we will.
When they are convinced that we
will stay the anti-inflation course, long-term interest
rates will come down sharply.
The appropriateness and viability of the monetary targets
currently used by the Federal Reserve, specifically the
M-l aggregate, and your views on alternative targets,
including the monetary base, a credit target, GNP, or
targetting of real or nominal interest rates.
I have come to the conclusion that we can no longer
measure the money supply of the United States with any
kind of precision.
By that I mean that we can no longer
draw a clear line between money and other liquid assets.
Innovation and the computerization of the financial
system are revolutionizing the manner in which the
American people handle their cash balances.
This has
brought us to the point where any definition of the
money supply must be arbitrary and unsatisfactory; i.e.,
161
it must include assets that some people view as short-term
investments (not transactions balances) and exclude other
assets that some people consider part of their transactions
balances.
Cash Management, Sweep, and Money Market Accounts
are making "idle" transactions balances disappear.
In
the future, people may have much less need for transactions
balances --funds may pass from a buyer's cash management
account to a seller's cash management account, existing as
transactions balances only long enough to complete the trip.
All of the monetary aggregates can be distorted by
shifts from one type of liquid asset to another, shifts
which have no significance for monetary policy.
To an
increasing degree, longer-term securities and real assets
have also become an abode of purchasing power because these
assets may be tapped for transactions purchases on
demand through modern credit arrangements.
More and
more purchasers look to their "lines of credit" rather
than their check book balances in completing their
transactions.
Thus, we have a serious measurement problem with
the concept of money.
We have been attempting to deal
with this problem by periodically revising the definition
of the money supply.
This raises another issue.
What
we call M-l in 1982 is not the same thing that we called M-l
in 1975.
There is no necessary reason to believe,
therefore, that the new M-l (and its successors of future
162
years) will behave in the same manner relative to nominal
GNP as the old M-l.
Furthermore, M-l velocities have
risen more rapidly in recent years in response to rising
interest rates.
Presumably, as interest rates move down,
we should expect a slowing in velocity--but when and by
how much?
With all the uncertainties surrounding both
the measurement of M-l and its relationship to the nominal
GNP, I have concluded that the monetary aggregates, particularly M-l, are no longer suitable guidelines for
monetary policy.
My suggested alternative is total liquid assets, which
is both stably related to the nominal GNP and unaffected
by shifts from one type of liquid asset to another.
I should add that the problems with M-l as a target
for policy are problems for the future, not the present.
If we had been implementing a total liquid assets target
in 1982, we should probably have chosen a range of 8 to
11 percent.
The growth rate for total liquid assets thus
far in 1982 has been somewhat above the upper limit of
this range.
Thus, a switch to total liquid assets would
not have produced an appreciable difference in monetary
policy in 1982.
# # # #
163
Chairman FAUNTROY. Let me begin by first saying to you, Mr.
Solomon, how much I appreciate the support and cooperation the
New York Federal Reserve Bank has extended to the subcommittee
in all of its activities. That does not suggest that other district
banks don't provide help—each of them does; but, New York,
which is a major financial center, is often the focus of a number of
concerns, and I just wanted to let you know how much I appreciate
your cooperation.
Second, I want to focus on a comment in your individual statement. On page 14, where you stated:
The long-run goal of monetary policy is to reduce inflationary pressures by gradually slowing the growth of money. * * *
That is certainly an important goal with which I do not disagree.
But where is the goal of employment? More importantly, how do
you and your colleagues, in setting monetary policy, see the relative benefits of reduced inflation as against the costs of increased
unemployment? In short, what is the worth in an additional 1-percent reduction in inflation as against increased unemployment?
Mr. SOLOMON. Mr. Chairman, I have been in the public sector off
and on 20 years with intermittent stops in the private sector. I
have come to the conclusion, I think most of the country has come
to the conclusion, that if we want sustained employment, at satisfactory levels, we have to handle the inflationary problem much
better than we have been handling it. There is no trade-off except
possibly in the very, very shortest timeframe between inflation and
unemployment, in my view. I was particularly struck by this in the
Carter administration, where I was Under Secretary of the Treasury, that the economic models, the macromodels, were very misleading. They consistently underestimated the inflation that we
could expect from the analysis of percentage utilization of capacity
in the country.
We all share in the Federal Reserve banks your concern about
getting a satisfactory and sustained recovery, which will bring
down unemployment levels. We believe, although there may be individual nuances among us—we do believe that the monetary
policy that we are currently following does leave room, does permit
a modest recovery in the next year or so, and presumably we also
believe that that is compatible with a further accomplishment in
the reduction of the rate of inflation. As you know, it has been
halved approximately in the last couple of years, and we believe
that there will be further gains next year, at the same time that
there will be modest recovery.
So I don't think of it as a trade-off. And I would hope that members of the committee would also be aware of our experience over
the last decade in which we, I think, have seen ample evidence
that it is not a trade-off, except as I say possibly in the very shortest timeframe. I hope that answers your question, Mr. Chairman.
Chairman FAUNTROY. It does. Mr. Roos, you said in your statement that if money continues to grow at a rate of 5 to 5 Ma percent,
economic activity should pick up in the second and third quarters
of 1983. You note, however, that this implies little improvement in
unemployment until the middle of 1983. A number of economists
have suggested that a somewhat faster growth of money is needed
164
to encourage the economy to pick up and grow, a minimum of 6- to
6V2-percent growth has been suggested by a number of people.
What would be the result of a somewhat higher Mi growth rate?
Also, what do you think might be the improvement in unemployment with that slightly higher growth rate?
Mr. Roos. Well, Mr. Chairman, the statement that I included in
my prepared statement was perhaps a little more precise than
anyone is able to really formulate, in saying that it would be until
the second or third quarter of next year where we would see improvement. If money grows at 5V2 percent—the upper limit of the
FOMC ranges, I think that there will be a gradual improvement
between now and the end of the year, or at least an absence of any
further downward trend, and that into next year we would see
future further steady and gradual improvement. I don't think it
can be precisely timed in advance, although we do believe that
there is a strong relationship between the rate at which money
grows and economic activity.
In terms of speeding up the rate of money growth rather dramatically in order to bring current relief to the serious problems of
unemployment, to bring stimulus to the economy, I believe that if
money were to grow significantly more quickly than the targeted
range, I think that we might see a very temporary reduction of unemployment, and a very temporary improvement in economic activity. However, I think that the financial markets would view an
expansion of the rate of money growth to be a signal of further inflation, and I think that interest rates would be adjusted upward in
the anticipation of increased inflation. And I think that any longrange improvement or growth in the economy would be frustrated
thereby.
So I would—I personally feel that our Mi target is reasonable, we
ought to stick with this target, and we ought to gradually reduce
them in the years ahead until we have really squeezed out inflation as a major problem in our economy. I think everybody would
be better off if we do so.
Chairman FAUNTROY. Thank you, Mr. Roos.
Mr. Paul?
Mr. PAUL. Thank you, Mr. Chairman.
My first question is to Mr. Roos.
In the first 6 months of this year, the St. Louis Federal Reserve
reported that the adjusted monetary base was growing at a 10.1percent rate. The report from the Washington Federal Reserve
shows the monetary base is growing at 7.4 percent. I am interested
in knowing why there is a discrepancy there, and also I am wondering if you yourself prefer to watch the monetary base, rather
than Mi. If these figures—if your figures—reveal that the monetary base is growing at 10.1 percent, and it is an important figure,
does this mean there is more money growth than the Federal Reserve is really admitting to, and does this mean in the next several
months we may have more price inflation than a lot of people are
anticipating?
Also, what has happened to the monetary base since those figures came out? They took us up to the end of June. Have July and
August shown rapid growth in the monetary base?
165
Mr. Roos. Well, first of all, from time to time there are differences in the growth of the monetary base as measured by St. Louis
and by the Federal Reserve Board of Governors. I think these are
due essentially to the way in which each of us handles the impact
of reserve requirement changes. These differences are usually short
term in nature.
We do watch the growth of the monetary base, because we think
it is related to the growth of Mi. After all, the monetary base and
the money multiplier affect money growth. And we, of course,
place a lot of importance on the rate at which money grows. The
monetary base has grown at a slower rate in the past 8 weeks.
From June 16 to the present the growth of the base as we measure
it has been about 4.6 percent. Actually, the rate over the past 6
months has averaged about 7 to 7V2 percent. So we are not concerned. We think that the growth of the base has been consistent
with what we believe the growth of Mi should be, and we are not
too concerned by the current fast growth in the base. In fact, until
recently we have been more concerned about a period of slow
money growth which we feel if continued could have had adverse
effects on the economy in the next year. But we think that the way
things are going now, there is less of a chance that money growth
will remain overly slow.
Mr. PAUL. Does this strike you as a problem, the fact that there
is discrepancy on a report of 3 percent? It seems that within our
own Federal Reserve System we get discrepancy of 3 percent, and
sometimes we have arguments about the definition of money. Over
the past 10 years we have changed definitions, targets, aggregates.
Does that not indicate a fruitless task? It seems that it is overwhelming insofar as defining money and regulating it, if we cannot
even get two branches to agree on these figures. If we happen to be
following a monetary base rule, the biggest question is, whose
figure would you be taking.
Mr. Roos. Well, let me respond in this way, Congressman Paul.
First of all, there are two primary aspects, as I know it, to monetary policy. One is to find some variable that will impact spending
or income; the other is to find a variable that will impact prices
without adversely affecting output. Furthermore, we try to find, in
choosing a target, a target which the Federal Reserve is able to
control.
Now, we have done an analysis of Mi, and found that it meets
these concepts satisfactorily. Of course no economic relationship is
perfect. There are short-term variations and occasional unexplained errors. But, by and large, if you examine its relationship to
output over the past—even over the period since 1979—and if you
examine as well as its impact on prices, Mi has performed these
two functions quite well. Second, the relationship between the
growth of the monetary base and Mi has been a fairly steady and a
fairly reliable relationship.
So in summary, if I am answering the question that you have
posed, while any of these aggregates and other variables are necessarily imprecise and always in need of continued examination and
reassessment, we think that Mi has continued to meet the criteria
for monetary policy uses, and we think that the relationship be-
166
tween the base and Mi has been very steady relationship in recent
years.
Mr. PAUL. I have a quick question for Mr. Morris. Since the Monetary Control Act was passed in 1980, we have permitted the Fed to
use foreign bonds as assets. And since that time, especially at the
Boston Fed, we have used foreign bonds on quite a few occasions as
collateral for Federal Reserve notes. Up until the end of August,
the Fed has used them on 70 different occasions, not for a large
sum of money, but as collateral for several billion dollar bills.
What is the reason that we use foreign bonds? Do we not have
enough Treasury bills to use as collateral? Why do we go ahead
and use that procedure? The bond is owned by the Fed and earning
interest. Why do we need to use that as a collateral for Federal Reserve notes.
Mr. MORRIS. From time to time we have small shortages of
Treasury securities to meet the collateral needs, and this gives us a
little more flexibility. Certainly, we do not buy foreign currencies
for the purpose of collateralizing our notes. The program of foreign
exchange intervention is largely under the dictates of the U.S.
Treasury. We implement the policy when there is an agreement
within the Government that we ought to do so. However, having
these assets on our books gives us a little additional leeway in covering the collateral requirement.
Mr. PAUL. Will we use the Mexican pesos or Mexican bonds for
collateral, do you think?
We have those now as assets in the Fed.
Mr. MORRIS. I will ask Mr. Solomon to answer that. He is in
charge of the Mexican situation.
Mr. SOLOMON. We take Mexican denominated currency assets
only in connection with our swaps. Presently we have outstanding
swaps as part of the official support package—both from the Treasury exchange stabilization fund and from the Federal Reserve. In
effect, these are denominated in dollars because we both buy and
sell the pesos at an exchange rate that is specified in advance and
will make us whole, in dollar terms, when they repay us.
Chairman FAUNTROY. The time of the gentleman has expired.
Mr. Corrigan, you have noted in your statement that there is
still a high level of long-term interest rates, which suggests that investors are not yet convinced that the progress against inflation
will be extended or even sustained—if I can use your own words in
that regard. What do you believe is needed to convince investors
that inflation is under control, and that the battle against inflation
will be sustained so that long-term rates will fall? What do we have
to do here on Capitol Hill and in Washington generally, to convince people we are serious about reducing inflation and keeping it
down?
Mr. CORRIGAN. I think we have to recognize at the outset that in
the current circumstances, interest rates and particularly these
long-term rates, really are as much a state of mind as they are a
statistic. And inevitably, they reflect both what has come before
and what people perceive may follow.
In the case of people that put up long-term money, such as State
government pension funds, the hard fact of the matter is that if
you were putting up long-term money in any size over the whole
167
decade of the 1970's, you got burned. In some cases, you got burned
very badly. And you also got burned in a context in which, from
time to time over that period, there were repeated assurances, both
here and around the world, that inflation indeed would come down
and stay down. So within that kind of historical perspective, I
think it is inevitable that lingering elements of skepticism would
still be there to some extent.
When you ask the question prospectively I can only give you an
opinion, because, as I said, what we are talking about is the collective state of mind of 200-odd million people. But it does seem
rather unambiguous, at least to me, that a major reason for that
continued skepticism has to do with the whole budget situation. We
have and we can engage in these great intellectual debates, about
what exactly these deficits mean, what they don't mean: Do they
crowd out; don't they crowd out? Do they contribute to inflation?
But my sense of it is that to the man or the woman on Main
Street, at the very least, they are symptomatic that something
seems to be wrong. And I think at the very least they do therefore
reinforce that skepticism. I think clearly deficits are an area in
which more needs to be done.
The other major relevant arm of public policy, of course, is monetary policy. Again, my perception would be that the gains we have
made against inflation are very substantial. We have begun, perhaps at long last, to translate these gains into a meaningful breakdown in the inflationary psychology.
I don't think we are at a point where we are home free. And because of that, I do think that maintaining that essential restraint
and discipline that we have been talking about in the area of monetary policy is very important.
If I may, too, Mr. Chairman, just tack on one point here that is
not directly related to your question. On this issue of ' 'where do we
go from here?" I think that it is important to note that at least in
the short run—and I fully agree with Mr. Solomon's comments earlier about the lack of a trade-off in the long run—in the short run,
we may be in a very advantageous technical position.
I do, for example, firmly believe that, for a variety of technical
reasons, we can expect that a modest pickup and growth in the
economy will be accompanied by less inflation. Now, that is a very
happy position to be in. We have not been there in a long time.
But if, for example, the economy were to start to grow even at a
moderate rate of 3 or SV2 percent, something like that, it is clear to
me that in the normal cyclical turn of events we would see roughly
corresponding increases in productivity; increases in productivity
in a context in which wage rate increases would come down dramatically.
We could, all of a sudden, find ourselves looking at a situation in
which unit labor costs, which in some ways are a good proxy for
inflationary pressure, are rising at a very modest rate compared to
the 10 and 12 percent we had been living with for a very long
period of time.
So again, I think we have a situation before us that does clearly
lend itself to at least the potential of having the best of both
worlds—the inflation rate continuing to come down in combination
with some improvement in both employment and output.
168
Chairman FAUNTROY. Thank you.
Mr. Reuss?
Mr. REUSS. Thank you, Mr. Chairman.
Gentlemen, in my opening statement, I referred to our current
financial predicament and wondered out loud about the role of the
Federal Reserve in it. Just a week ago, I was in Vienna, sitting
with the president of the Austrian National Bank and his colleagues, and I said to him, Austria's record remains a bright spot
in the international horizon:
Your inflation is negligible, well under control; your unemployment is marvelous
by our standards; your balance of payments is good, and you, of the Central Bank,
have participated in this growing performance and have done so without excessive
turning-on of the printing presses.
Their rate of growth in Austria has been on the order of 3 or 4
percent in the last 8 or 10 years, which is analogous to the productivity increase.
I asked:
How have you been able to do this and create the necessary credit which has
sparked your industry, your solid agriculture, your technological growth, the
amount of housing which you have continued to build in bad times and good?
The answer was that, in Austria, it is customary to invite in the
14 leading banks and see if a consensus cannot be worked out that
loans for commodity speculation, or fast buck loans to far-off foreign countries, or loans for corporate megalomania and agglomeration, should be discouraged. And as a result, even with a rather
controlled amount of new money in the economy, that country has
been able to prosper.
My question is: What has the Federal Reserve done in recent
years to prevent the Bunker Hunts from getting their hands on billions of our scarce supply of credit to gamble in silver? What has
been done to prevent and tone down the wave of unproductive corporate mergers and acquisitions that have nothing to do with new
investment and of which the current example is the Bendix-Martin
Marietta extravaganza?
What has been done about reasoning with the large American
banks about not diverting endless scarce credit resources to the Argentinas and Mexicos, while American farmers and homebuilders
and small business, even large businesses, are high and dry and on
the rocks.
What is the record of the Fed? What have you all done? How
Austrian have you been?
Mr. SOLOMON. Well, Mr. Reuss, I would strongly argue that the
reasons for the relatively satisfactory economic situation in Austria
are not the reasons that you attributed it to. Roughly, 50 percent of
their GNP is represented by foreign trade. They tie their schilling
to the deutschemark. They benefit from the price stability relatively that the German economy has had. Since they are a small country, they have cooperation from their labor unions in terms of restraining excessive wage increases. I think that to the extent that
they do discourage what you call unproductive use of credit, that it
is a minor factor, frankly.
Mr. REUSS. I didn't mean to launch on a seminar on Austrian
wirtschaft politics. We can do that another day.
169
I return to my question: What have you Federal Reserve banks—
admittedly everyone of your bank districts is bigger than Austria,
four or five times as big—but what have you done to take some of
the starch out, in a timely fashion, from the credit-wasting Bunker
Hunts and Bill Agees and the rest of the lot.
Mr. SOLOMON. Let me say this, Mr. Reuss.
The one experience that the Fed has had with a systematic effort
to curtail the use of credit for so-called unproductive uses was
when the Credit Control Act was invoked in March 1980.
Mr. REUSS. That, if I may say so, was a noddle-headed disaster—
which I protested the next day. That fooled around with retail
credit, and money market funds, all sorts of irrelevancies. It did
not really come to grips with the problem I am describing here,
namely, the waste of credit.
Mr. SOLOMON. YOU are right that the program was larger than
that. But that was also a part of the program and, as you say, it
did not work very well. The Fed traditionally has felt that the
market mechanism for allocating credit was a more efficient mechanism; that it was very difficult for administering authorities, for
Government officials, to make decisions as to which credit uses are
more productive. Also it would take, I am convinced, very substantial backup legal authority to implement any views like that.
Simply jawboning would not be in my view very effective, begging
the question of whether that is a more efficient way and whether
we have the capability of judging which credit uses are more effective.
I think there is a plausible attractiveness to what you say, although let's say in the case of a takeover—and I don't want to
defend any particular set of arrangements—the money paid to
stockholders of the corporation being acquired flows back into the
capital market. The pool of capital is not reduced. Second, there
have been cases where takeovers have resulted in more efficient
and productive operations in the long run.
I am sure there are cases where takeovers have not resulted in
greater productivity, either for the company or for the economy as
a whole. I don't know, though, that we are really equipped to make
that kind of decision. And I don't think you would want to urge
that the Fed attempt to discourage—that would be ineffective
anyway, jawboning—all possible takeovers. We would have to make
a judgment as to which are productive and which are not. I don't
think we have that capability, frankly.
Mr. REUSS. Thank you. I am over my time.
Chairman FAUNTROY. Mr. Barnard?
Mr. BARNARD. Thank you, Mr. Chairman.
I certainly want to take this opportunity to welcome all of you
gentlemen here today. After your very enlightening testimony,
these hearings could probably go into the far hours of the evening.
But time is of some restraint.
I would like to come at you from two different questions.
Mr. Corrigan, I believe when you were discussing monetary
policy, you indicated that the period of time when the Fed used interest rates to control inflation or to attempt to control inflation
was a disaster. Has there been any consideration to trying to ap-
170
proach it from the standpoint of monetary control and interest
rates, a combination of both?
Mr. BOYKIN. Congressman Barnard, in using the interest rate as
a target, it is mainly a matter of emphasis. I don't believe we have
used one particular target to the exclusion of all others. Nor is it
true today. But the concern that I have with trying to use interest
rates as the target is the difficulty of raising interest rates and
raising them sufficiently to accomplish the objective.
It is a very difficult thing to do, to take a deliberate action to
raise interest rates by x number of points. I think there are other
ways that this can be done. Interest rates then can seek their own
level.
Mr. BARNARD. What are your suggestions as to how we are going
to increase demand in the marketplace? That is where our problem
is today. I know this is a long-range program that we are going
through.
As my colleagues on this subcommittee know, I have been very
sympathetic with the Fed and what you are doing. But it is getting
to the point now that if we are going to increase the gross national
product, we are going to have to increase demand at some point.
How do we do that?
Mr. BOYKIN. Well, my own judgment is that the policies we have
in place, that our announced intentions in terms of monetary
growth, as we go into 1983, provide room for this to happen. It is a
longer term problem. It is a difficult problem. It seems to me that
we have come pretty far down the road. And I would have a lot of
concern if we shifted that course and tried to restimulate. As President Corrigan was saying, inflationary expectations might increase.
And I think that is critical.
Mr. BARNARD. Because of time, I need to shift.
Mr. Corrigan, I was impressed with your report on what the Fed
is doing as far as pricing services is concerned. Could you tell me
what the general attitude of the Fed is as far as competing with
correspondent banks? What is your general attitude toward that?
Mr. CORRIGAN. That is a difficult question to answer, Mr. Congressman. Our posture, I think I would best describe as one in
which we believe that pricing or not, we have an ongoing responsibility with respect to the payments mechanism and with respect to
providing at least some payment services. We feel that in order to
be effective in fulfilling that responsibility, as well as being responsive to the particular stipulations of the Monetary Control Act,
that we have to maintain a reasonable presence in the market, so
to speak.
Mr. BARNARD. In other words, you don't feel that your policies of
pricing would be so overaggressive as to take business away from
correspondents?
Mr. CORRIGAN. We are certainly trying to avoid that.
Mr. BARNARD. Tell me—you probably know where I am coming
from, because I have written letters to the Fed about this subject.
But I am keenly interested in it.
You mentioned in your testimony that you were changing certain policies with reference to check collection, especially in the
courier-type services. My understanding is that the Fed is getting
ready to inaugurate a policy whereby your courier system, after
171
picking up items, could get there 2 hours after the others, and it
would have the same day's credit, whereas if a correpondent bank
was handling the same items at the same time, it would be credited
the next day—am I wrong in that understanding?
Mr. CORRIGAN. I wouldn't say wrong. Let me try and
Mr. BARNARD. I would like to understand. It appears to me in
this particular instance that you are giving the Fed a 2-hour time
limit advantage over private enterprise, and my evaluation of that
would be that conditions of check clearing fall under the same policies as we passed in 1980 as far as pricing.
Mr. CORRIGAN. Let me try and comment on that briefly, if I may.
First of all, we are talking about an overall program that, in the
first instance, is designed to accelerate the collection of checks, and
it will do that beyond dispute. Part of the mechanism that allows
us to do that is condensing our own processing times, and part of it
is that we have changed, or we are proposing to change, certain
transportation requirements.
Under the proposal put out for comments, checks are going from
Chicago to Atlanta, and they are on the Fed network, and they are
unprocessed, they can get there later than if they came in from
some other sources. The reason for that is an operational one, it is
an attempt to build in some control.
Mr. BARNARD. But you don't think that is discrimination?
Mr. CORRIGAN. Let me finish, please.
It is a problem. I fully agree with that. We are actively exploring
ways in which the necessary controls can be maintained and that
particular problem can be dealt with. Even now, as the proposal
stands, a correspondent bank could deliver a so-called package of
checks at the later hour, but it could not deliver unsorted checks.
We are trying to figure out a way in which the overall objectives of
the program can be maintained while permitting some kind of accommodation of that very problem.
Mr. BARNARD. YOU don't think that subject is important enough
to extend the period of comment? I know you have turned us down
completely on the comment period. It appears that they would talk
about a highly sensitive subject.
Mr. CORRIGAN. The formal comment period, as you suggest, was
terminated. We have received something in excess of 500 letters on
the overall proposal. There will be a continuing dialog.
Mr. BARNARD. When some of these correspondent banks wake
up, you are going to find 1,500 letters.
Mr. CORRIGAN. My suspicion, Mr. Congressman, is that they are
all pretty well awake. I think I have a few bruises to suggest that.
The point I was trying to make, though, is that while the formal
comment period has ended, there is a meeting tomorrow morning
between myself and some of my colleagues with the correspondent
banks on this very subject. Tomorrow afternoon I am meeting with
the couriers on this very subject. Next Tuesday there is a very
large group of banks and thrifts that are coming in to meet with us
as well. The dialog is there. And I will say that I am reasonably
confident that we will be able to find a device that will preserve
the broad objectives of the program and, I think, take care of the
problem that you speak to.
Mr. BARNARD. Thank you very much.
172
Chairman FAUNTROY. The time of the gentleman has expired.
Mr. Neal?
Mr. NEAL. Thank you, Mr. Chairman. I am just wondering how
much time we have to make that vote.
Chairman FAUNTROY. We have about 7 or 8 minutes.
Would you like to claim your time when you return?
Mr. NEAL. I would like to do that.
Chairman FAUNTROY. All right. Let me continue with a couple of
questions that I have.
Gentlemen, you will notice the Chair has remained here during
the course of several votes. That is because, while I represent more
people than any single Member of the House, and more people
than elect 14 Senators in the other body, the citizens of the District
of Columbia still endure the tyranny of taxation without representation. And we have not as yet ratified the D.C. voting rights
amendment, which would accord District residents the same rights
that every other taxpaying American has, and that is the right to
elect someone to represent them with a vote in the U.S. House and
Senate. That aside, I would like to continue my questioning.
Mr. Solomon, you have been a leader in expressing concern and
interest about innovations in the financial markets. Indeed, I recall
placing into the record last year some of your thoughts from a
speech that you made in New York City, and I would like to focus
some on these issues. What do you foresee coming down the line in
the next several years? I am particularly interested in the changing character the retailers and money funds may take as financial
businesses become more oriented toward a fee-for-service structure.
Are retailers able to fully understand the financial business? What
will the money funds do when the higher yields that they have offered diminish considerably? Are the funds going to stretch out
their maturities and go along with some increase in risk to liquidity, or, will they offer other service? What effect is the whole arena
of electronic banking and interactive computer terminals likely to
have on financial innovation and the ability of the Fed to control
the monetary system? What does this mean for privacy? What does
it mean for banking as we see it now? Will banks charge to see a
teller?
Mr. SOLOMON. Well, you have asked quite a few questions there,
Mr. Chairman. I will do my best.
Chairman FAUNTROY. Questions of where the banking industry is
going in terms of the innovation and service.
Mr. SOLOMON. I think there are a few trends that are clear. One
is that there will be more electronic use, more remote service, automatic remote service units, where individuals can do their banking.
There may possibly be some development of home computers, although I think that is pretty far off, but some work is going on in
that area in banking circles, whereby one can make financial
transactions from one's home on terminals that would be geared
into the banks.
In general, I think there is a trend toward institutions supplying
a wider range of financial services. You have heard the expression,
"financial one-stop supermarkets," so to speak. I would take that
with some grain of salt. But I think there is an efficiency gain in a
trend in that direction.
173
We have tended to see the erosion of specialized financial institutions. That is very obvious in terms of the future of the thrifts. The
whole process of greater automation, greater convenience for individuals and the public to do their banking, I think that will likely
go on.
Now, what are the implications for the Fed and for monetary
policy? I don't see that the technological changes are going to cause
us direct problems in running monetary policy. However, I do believe—and this is a personal view, although I think some of my colleagues share it—that over the long run if you combine the innovation that we have been seeing with full deregulation of all interest
rate ceilings, so that eventually we see a spectrum of all deposits
paying market interest rates, aside from the service fees charged,
this does create some complications for longrun monetary policy
after a few more years.
It seems to me that the Fed will have less direct control with its
traditional instruments of people switching from money into nonmoney, and vice versa, because all money will be paying market interest rates as nonmoney instruments are paying market interest
rates. Interest rate elasticity will be lowered, to use the jargon. One
way of making it feasible to continue monetary control along the
lines that we currently run it in that environment would be to
place what I call a moat around transactions money. I think Chairman Volcker has referred to this in testimony, but I don't know if
he has gone into any detail on it.
It seems to me that if we had a notice requirement separating
the transaction money from other forms of money, say a 7-day or
14-day, or whatever, notice requirement, and that applied to money
market funds as well as other innovative forms, we would be able
to preserve a more effective monetary policy running more or less
along our monetary aggregate targeting lines.
If the Congress in its wisdom does not see fit to give us that kind
of authority, then I would assume, and this is a personal view, that
in the long run we would have to look for some variance of our
present monetary targeting approach.
I hope I have been responsive to your question, Mr. Chairman.
Chairman FAUNTROY. YOU have.
Mr. Weber?
Mr. WEBER. I am sorry about the disjointed nature of the questioning, and most especially the listening, because of the votes. It is
unavoidable.
I think my question is directed to any member of the panel. I
refer to page 9 of Mr. Corrigan's testimony, in which you have said
that "I would simply suggest that the other potential policy targets
frequently mentioned, real or nominal interest rates, the monetary
base," and so on, "will not yield magical solutions to our economic
problems."
The American public does seem to be looking for magical solutions. They seem to be of the mind that the Fed has it within their
power to bring down interest rates.
I would like you to elaborate on your statement. Why won't targeting interest rates, for example, along with the monetary base,
be a magical solution to the problem?
99-756 0—82
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Mr. CORRIGAN. Let me first respond in general, Congressman
Weber.
The point I am trying to make is that as you look at the spectrum of possible targets for monetary policy, it is my judgment
that when all is said and done, the practical differences from one
to the other are quite small—realizing that regardless of choice you
simply have to maintain consistency.
Your specific question which I think is similar in thrust to one
Mr. Barnard raised earlier, "why not look at a combination of, say,
interest rates and the base of the money supply?" I think there are
two points that are relevant. The first is that even if you are using
the money supply or the monetary base, interest rates are obviously very important because, as a practical matter, interest rates and
changes in interest rates are the vehicle around which individuals
and corporations and banks and everyone else make the portfolio
adjustments that in turn manifest themselves in higher or lower
levels of the money supply. So they are there, no matter whether
you are explicitly targeting on them or not.
Now, on the question of targeting rates in combination with
something else, I think the problem is a behavioral one. At any
point in time you may find that a particular level of interest rates
is compatible with some particular rate of growth of money, however you define money. But at another point in time, that relationship is quite different. Right now, for example, where in round
numbers the money supply is growing at 5Vz percent, and shortterm interest rates, again in round numbers, are in the 9- to 10percent range. You can go back over the last 10, 15, or 20 years
and find situations in which the money supply has grown at 5 percent, and those same rates are 18 percent. You can also find periods when they were 2 or 3 percent. The relationships between interest rates and money growth are not stable in the sense that you
can say with certainty, or with anything even approaching certainty, that if you target some particular interest rate, money growth
is going to be what you want it to be; it is not that kind of a relationship.
Those, in combination, are some of the reasons for the thrust of
my statement. But I think the really important point, at least in
my mind's eye, is the one that you have pointed out: financial discipline, however you measure it, is essential and is something that is
perhaps easier to maintain than to achieve. Getting financial discipline is a difficult problem, no matter what target you choose to
use.
Mr. WEBER. Would any of the other members of the panel care to
comment on the question?
Mr. Roos. I would only add in the most simplistic fashion possible that I don't know of any way in which the Fed can control interest rates over any longer period of time. I think that the ball
game today, the environment today, is significantly different from
when I originally studied economics.
In those days the Fed, by providing, by expanding the availability of reserves, increased the supply of loanable funds and interest
rates came down. Now, that was before 15 years of inflation, and
exactly the opposite occurs and would occur if the Fed tried
175
through traditional means to reduce interest rates by increasing
the supply of available money.
And I think a large portion of the public still feels that the Fed
can raise and lower interest rates and can control them in the long
pull. I very, very much disagree with that ability. All we can do is
create the environment, the noninflationary environment, which
would cause interest rates to drop, and beyond that there is nothing that I know of that the monetary authority can do to control
interest rates.
Mr. WEBER. I see.
I have been advised my time has expired.
Chairman FAUNTROY. Thank you.
The time of the gentleman has expired.
Mr. Patman?
Mr. PATMAN. Gentlemen, at the time these goals are announced
or indicate a tighter money supply objective by the Federal Reserve, do you keep your eyes on interest rates as well as so-called
money supplies? Each one of you does? And you are getting reports
all the time about that?
We hear a lot of talk about the inflationary expectations that
lenders tack on in order to lend funds. Is it not true that lenders of
money charge as much as they can for as long as they can?
Mr. SOLOMON. I think that is true.
Mr. MORRIS. Yes, but it is a very competitive market. You cannot
charge more than your competition is charging and continue to
lend to any degree.
Mr. PATMAN. Any individual lender will charge as much as he
can for as long as he can?
Mr. MORRIS. That is right.
Mr. Roos. Just as any individual borrower will try to borrow
money or invest his money at the best possible return to him. This
is the way the free market works.
Mr. PATMAN. Surely. Would lenders be able to charge as much as
they charge now absent the tight money policy of the Fed?
Mr. Roos. I think that if the Fed policy were more accommodating, easier, then interest rates would be significantly higher
than they currently are. I think that what led to high interest
rates was the willingness over past years of the Federal Reserve to
create the expansion in the money supply which led to inflation—
there is a direct relationship—and when inflation occurred, and
people became conscious of the impact of inflation, interest rates
moved upwards rather than down.
Mr. PATMAN. SO what you are saying is that the Fed is helping
us by keeping money tight and therefore keeping interest rates
low?
Mr. Roos. I think that by keeping monetary growth under control, yes, sir. I don't think it is tight currently, because in our district banks, lenders do have money to lend. I would not characterize present policy as tight. But certainly if the Fed became expansionary, I think we would have a significantly higher level of interest rates than we currently have.
Mr. PATMAN. Well, let me make sure I understand that each one
of you agrees that when we have tight money we don't have higher
interest rates, we have lower. Is that what you are telling us?
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Mr. SOLOMON. I think I would make a distinction between short
rates and longer rates.
Mr. PATMAN. Make that distinction. Say short rates.
Mr. SOLOMON. Well, I think that you have various factors at the
short end of the market. First, if money supply goes up, you do get
a market reaction in which rates, at least initially, rise. All other
things being equal, I would feel that a larger money supply, feeding more reserves to the banks, would in the very short run, and at
the short end of the market, tend to lower rates. However, I agree
with Mr. Roos that in the longer end of the market, the markets
would react quite differently. If they saw money supply being significantly increased, beyond what would seem reasonable targets,
they would expect a higher level of inflation and I think in the
medium- and long-term part of the market—the rates which are
more significant to business investment in the country—those rates
would rise.
Mr. PATMAN. I just really question what you are saying there. I
hear it frequently. People who lend money will withhold that
money in some way, or shift it to some other investment—begin
speculating in gold, stocks, or something of that nature?
Mr. SOLOMON. There are various factors. Certainly during the
period of the higher inflationary expectations we did see that there
was a lot of investment in gold, collectibles, real estate, and that
money was not available in the capital markets. I don't think there
would be much difference of view on that.
The decisions among different kinds of financial assets that are
made when inflationary expectations rise again are more complex.
But even there, we have seen a virtual collapse of the bond market
at a time when inflationary expectations are very high.
Mr. PATMAN. That is true of the long-term bond market when we
had high rates. Now are we seeing a resurgence of long-term
bonds?
Mr. SOLOMON. We have seen an improvement in the bond markets coming along with the reduction in short-term rates because
the market feels that the Fed is consistent on its anti-inflationary
policy.
Mr. PATMAN. IS that really true, or is it they decided they want
to get the larger yield, they are available in long term, and they
feel they can justify that somehow, and take a chance on inflation—that the rates would remain relatively stable? And they
cannot get this higher rate on the short-term market.
Mr. SOLOMON. Well, I am in New York, which is the center of the
financial markets. I see these people every day. I think it is an
almost universal conviction of the players in those markets that
what I have said is true.
Mr. PATMAN. Certainly it is true also that an investor would not
sit out and leave his money uninvested; isn't that true?
Mr. SOLOMON. That is true. But as I say, he can either move into
nonfinancial assets, or he can move into what he thinks will be
somewhat less unsatisfactory inflation hedges. Those vary among
the different kind of assets available, or just stay short.
Mr. PATMAN. Thank you.
My time has expired.
Chairman FAUNTROY. Thank you.
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Mr. McCollum.
Mr. MCCOLLUM. Thank you, Mr. Chairman. There has been a lot
of discussion in our committee, on the floor of the House, and elsewhere with regard to the prime topic of concern today; interest
rates and the Federal Reserve Board's role in what you have discussed today, of course. But one area has not been asked about that
I would like to explore with you, and that has been the subject of
considerable discussion in this subcommittee over the past few
weeks.
We have seen Business Week, for example, report not too long
ago that, as opposed to consumption of about 5 percent in the
1960's, that the Federal Government this year is expected to consume about 70 percent of all available capital in this country.
Now, that may be on the high side of estimates, but they did
make that kind of an assertion, talking about the pool of savings,
the buildup of reserves for that purpose by businesses, surpluses in
State and local governments, and so forth. It is a staggering sum.
I think most of us who have thought about it recognize the only
way we are really going to get the pressures off the marketplace
for money is by getting the Federal Government out of the business and reducing its scope and its size and involvement in consumption of this money.
The problem that has bothered us is the inability of Congress to
reach a consensus on where to make the spending reductions or
the tax increases or whatever to reduce the deficit sufficiently
enough to bring down that consumption, that use by the Federal
Government of the money. As a result of that, we still continue to
drift with what most of us believe is too high interest rates.
Some would have suggested, as they had in some proposed legislation, that the Federal Reserve Board target interest rates again. I
am not going to ask you about that this morning. I don't personally
agree with that.
There have been others who have very seriously suggested, and
this subcommittee has been exploring, the possibility of a national
usury ceiling for the short-term duration indexed to the rate of inflation. The idea being that this is not desirable, certainly not as
long-term policy, but that with only a limited supply of money
available, without reinflating factors taking place by your body,
that this may be the only way to fairly allocate the limited resources among the American public at a price that everybody can
afford, as long as Congress isn't willing and while Congress is in
the process of gaining a consensus to refuse the Federal pressures
involved in this by the tremendous overspending we have been
doing.
I would like to ask Mr. Boykin first what is your reaction to that
proposal, how would it affect the Federal Reserve System if it were
enacted?
Mr. BOYKIN. Well, I would have to respond right up front that I
have a bias against regulation. I have a bias against setting limits.
I think that the marketplace is the best place to determine what
the cost of money should be. As to what the implications for the
Federal Reserve would be should there be a national usury ceiling.
Frankly, I am really not prepared to address that, at this time.
Mr. MCCOLLUM. Mr. Morris, do you have a thought on that?
178
Mr. MORRIS. The history of usury ceilings reveals that if the ceiling is below the level that the market would consider a satisfactory
return, the funds are diverted to other uses. A national usury ceiling, if it was set low enough so that the investor thought he was
not getting a fair return, would lead to diverting those funds outside of the financial markets to buying land or gold or what have
you, or going abroad.
Mr. MCCOLLUM. Isn't the question where the rate of return is,
rather than can it be accomplished?
Mr. MORRIS. If the usury ceiling is higher than the price that the
market sets, it is not disrupting the flow of funds, but it really is
not accomplishing anything. I think it is another example of the
kind of belief, a natural human reaction, that when we are in difficult times, that there has to be some simple, easy gimmick that is
going to get us out of all of these problems without any pain and
suffering. Unfortunately, I think the answer is there is no such
gimmick. I do not think the usury ceiling would accomplish your
desired purpose.
Mr. MCCOLLUM. Anyone else want to comment on that?
Mr. CORRIGAN. I would be very uneasy about this, at least as you
describe it for two reasons. First, even if you could figure out a way
to do it, and I am not sure that is altogether easy, it would still be
true that the Government itself would be the first one "in" in
terms of absorbing the funds. I don't think a national usury ceiling
would deal with that problem.
Second, and, I think Mr. Solomon just mentioned this and I
would just emphasize—that we have a worldwide situation today
with our money and capital markets in which money is extremely
fungible. I would just suggest that one clear potential pitfall,
beyond those Mr. Morris has mentioned, is that if you set the ceiling in a way that is in some sense binding, what you end up with is
a sizable flow of money abroad. You end up with less net money
available, particularly within a context where the Government
itself is still going to be first in line for available funds.
Mr. MCCOLLUM. One thing that has been interesting to us is the
suggestion that we set it at some percentage figure, substantially
above whatever the rate of inflation is at the time, which historically economists have claimed is the rate where you can make
money in the banking system, and profit is there, and within the
normal bound of where it historically has been. In some fashion in
regard to that we would not, in fact, be threatening the free enterprise marketplace in the actuality, but simply in the expectation
area.
Mr. MORRIS. The problem with that, Congressman, is that the investor, particularly when he is examining a long-term instrument,
is concerned not only with what the current rate of inflation is, but
what he expects the rate of inflation to be over the term of his investment. You may have a usury ceiling that doesn't look very
binding in terms of the current rate of inflation, but if the investing community expects the rate of inflation to rise in the future, it
is going to be binding then.
Mr. MCCOLLUM. What I am suggesting is indexing it to the rate
of inflation, so if the rate goes up the ceiling goes up, so it is not a
fixed ceiling.
179
Mr. MORRIS. Yes, but you would be fixing it to the current rate of
inflation.
Mr. MCCOLLUM. You would be starting at some point certainly.
Mr. MORRIS. If the market thinks that the rate of inflation in the
future is going to be higher, that will still mean that the instrument will be binding and cause a diversion of funds.
Mr. MCCOLLUM. I follow your logic and understand.
I yield back the balance of my time, Mr. Chairman.
Chairman FAUNTROY. Thank you.
Mr. Neal?
Mr. NEAL. Thank you, Mr. Chairman.
Just to pursue that logic for a minute, isn't that the problem we
have now. We have a national economic plan that doesn't make
any sense, and the investment community understands that it does
not make any sense. We are running massive budget deficits, and
no one can predict what the Government is going to do over the
next several years.
We have a plan that is not serious. No one takes this idea seriously that you are going to increase defense spending at the rate
we are, and cut spending at the rates suggested, and cut taxes the
way we have, and that is going to result in a balanced economic
plan.
The investment community is looking at that and saying it
doesn't add up; doesn't make any sense; is not serious. So they are
saying, who knows what corrections will be made in the future—we
certainly cannot stay with this?
On the one hand, we have calls for starting the printing presses
again. On the other side, we cut taxes and we raise them. The question I would ask of anyone that raises these kinds of questions is,
Would you give $1,000 to someone for 20 years, at 2 percent or 3
percent over the rate of inflation today? I don't think you would. I
would not. It doesn't make any sense. It is unpredictable.
It seems to me until we get some balance back into the plan, we
are going to have these continuing high real interest rates. Isn't
that the case? I think it is.
Everyone is nodding their heads yes. So I think they agree.
I think that is what it is going to take. The balance is not there.
I would like to get a specific response. Isn't the reason real interest rates remain high, is that there is no logical person is going to
be willing—talking about long range now—no reasonable person is
going to be willing to commit money for 20 years at a rate similar
to historical interest rates related to inflation under these economic conditions?
Mr. Roos. I would respond by saying, yes. Though, if we are dealing essentially with monetary policy today, I think that the Federal Reserve and its policy deserve whatever credit is forthcoming for
having displayed a consistency of its policy, and I think that has
been the primary reason why long-term rates have dropped even
though they have dropped rather slowly. I think—and this may be
impertinent to say—that the other side of this equation is for Congress and the administration to demonstrate an ability to bring
down these deficits. I think that more people are aware of deficits
than they are the subtle sophistication of monetary policy. If you
180
get out on the golf course with the guys I play with, they don't
even know what Mi is.
Mr. NEAL. I agree with you 100 percent. I believe that the Fed is
to be credited 100 percent with the reductions in inflation and interest rates that have taken place over the last 2 or 3 years. And I
don't think you can attribute 1 percent of it to the economic plan,
if you can call it that, that we have in place in this country today.
It just made matters worse.
The Federal Reserve by limiting money growth has brought
down the rate of inflation, I think, and has to its credit established
some predictability and consistency in the conduct of monetary
policy.
Now, on the other hand, in the face of that, we have a fiscal
policy that as I understand it is running counter to the monetary
policy established by the Fed, and as a result we have high interest
rates and have unsettled financial markets and high unemployment and a disastrous economy.
Everyone agrees with that.
Mr. SOLOMON. Will the record show the degree of nuances of our
smiles or nodding?
Mr. NEAL. The balance certainly is not going to be restored on
the fiscal side, by just cutting deeper into programs that affect disabled people and older people and sick people and so on. We don't
have to do that to straighten things out. We have to be willing to
pay our bills, it seems to me.
Let me stop speechmaking and ask another couple of questions,
if I may.
May I raise one or two questions?
Chairman FAUNTROY. I will allow you one.
Mr. NEAL. I thought I heard one of you say you had some advanced view of statistics. I am curious if among those you had some
idea what the unemployment figure is going to be from the Bureau
of Labor statistics?
Mr. MORRIS. I may have mentioned that our directors serve as
the source of intelligence as to what is going on before the statistics come out. But that doesn't extend to knowing exactly what the
unemployment rate will be before it is released.
Mr. NEAL. YOU know, Congressman Paul and I were both on the
Gold Commission. There has been a considerable interest in the
question of pegging money to gold and so on. At first it is very interesting that in recent days, at a time when the rate of inflation
has been coming down, clearly coming down, that the price of gold
has been going up rather dramatically. I think most of those, including my friend, Mr. Paul, would want to peg money to gold, because they would want some consistency in monetary policy, and
the gold would be a warning of inflation. But it seems clear to me
that the price of gold has gone up for reasons totally different from
any concept of the rate of domestic inflation. And in fact probably
because of uncertainty in world financial conditions.
Mr. MORRIS. But also because the cost of carrying gold is down
when the short-term interest rates fall. That has been a major
factor, I believe.
181
Mr. Roos. We don't know what the Soviet Union would have
within its power to manipulate the price of gold and deal us a fight
on it.
Mr. NEAL. In fact, the Soviet Union did dump some gold on the
market earlier this year, and probably affected the price. Wouldn't
you think that would be true?
Well, I certainly appreciate, Mr. Chairman, your indulgence.
Chairman FAUNTROY. Thank you.
Mr. Lowery.
Mr. LOWERY. Thank you, Mr. Chairman.
Gentlemen, welcome.
Do all of you serve on the Open Market Committee of the Federal Reserve?
Mr. Roos. We all attend, but some of us are not current voting
members.
Mr. LOWERY. YOU all attend. My first question is what things do
you discuss? How do you arrive at your decisions, and why did you
decide to cut the discount rate?
Mr. SOLOMON. May I answer. First of all, with regard to discount
rate changes, that is done by the Board, not by the FOMC. The
Board reacts to recommendations from the different Federal Reserve banks. But the final say is with the Board of Governors, not
in the FOMC. But in the FOMC, to answer your earlier point, our
agenda is a pretty wide one. We have a review by the staff and
then by the members of the FOMC, based on their district situation
as well as basic economic conditions in the country. We have a discussion of the financial and credit markets. We have a discussion
of the monetary developments. And all that is before the rather
protracted discussion that frequently takes place, as to what the
decisions are to be. There also is a report on the international side.
And, of course, the exchange rate situation is a factor as well. If
you have something more specific in mind, we would be pleased to
answer it.
Mr. LOWERY. The decision to cut the discount rate—you all didn't
make it. But at the meetings you attend, don't you make recommendations? What is the nature of those discussions? How did the
decisions come about to cut the discount rate?
Mr. Roos. If I may, Mr. Chairman, I haven't been aware of much
discussion of discount rates at the FOMC meetings. These are discussed in our various boards of directors. But I think that those of
us who believe in the conduct of monetary policy by some control
of some monetary aggregates recognize that that control is more
easily accomplished when the discount rate is kept fairly close to
short-term interest rates, specifically the Federal fund rate. And so
we, for example, in our policy actions in the Eighth District, in St.
Louis, we like to see the discount rate adjusted so that it remains
in very close proximity to the Federal fund rate or any of the other
short-term rates, because we think this minimizes any distortions
in member bank borrowings at the discount window, and facilitates
the conduct of monetary policy.
Mr. LOWERY. IS that universally followed by other districts?
Mr. CORRIGAN. The answer to your specific question, in this particular context, is that the reductions in the discount rate that materialized some weeks ago occurred in a context in which market
182
rates had, of their own momentum, come down. And broadly speaking, the money supply and other things that we look at were behaving in ways that were broadly compatible with our objectives.
Mr. LOWERY. There are many that would argue that you are not
following trends, but you are rather stacking them. That prime
came down after the Federal Reserve Board
Mr. CORRIGAN. Prime had come down a bit. But the short-term
market rates, the T-bill rate
Mr. LOWERY. Prime had come down from about 21 V£ to about 16,
16 V2 percent, and the remaining 3 percent, it strikes me, is strictly
a result of Federal Reserve policies.
Mr. MORRIS. I think about 90 percent of the time the changes in
discount rates are made in response to changes in market rates
that have earlier taken place. There are exceptions. One occasion I
recall in particular where we wanted to send a strong signal to the
market—our October 1979 meeting—we did discuss the discount
rate and we did agree that a 2-percent increase in the discount rate
would capture world attention and have a stabilizing influence on
the foreign exchange market, where the dollar was then under extremely heavy pressure. So there are occasions when it is used to
send a signal to the market. But in the normal course of events, it
tends to follow what has already happened in the market.
Mr. LOWERY. Why were the decisions made in early summer to
start cutting the discount rate, about four times now in the last 2,
2V2 months. Why not in spring? What happened? What was different in June as opposed to March?
Mr. SOLOMON. We follow, given our monetary targets, certain intermediate targets on nonborrowed reserves. What you had was the
Mi money supply running negative for 3 months, in the late spring
and early summer as we continued to put in nonborrowed reserves
according to the targets that the committee had set, that in itself
created some easing in the markets. Market rates began to fall.
The discount rate affirmed the direction of that movement. And I
think if you check the movement between the Federal funds rate
and the discount rate, you will see that the discount rate moves
were made more or less either shortly following or simultaneously.
Now, there is no secret about Federal Reserve monetary policy.
Chairman Volcker has explained many times that we would like to
come in around the upper end of the range, because we think that
is what the economy needs. And, consistent with our sense of financial discipline and anti-inflationary monetary policy, we would like
to see interest rates as low as possible, of course. But it has to be
consistent with our overall approach in order for it to be a longrun
sustained noninflationary growth the country will resume.
Therefore, the timing that you referred to was one where the
monetary conditions, the situation in the credit markets, because
also credit demand slackened at that time, permitted easing in the
markets and then the discount rate cuts affirmed that movement.
That was not true in the early spring, where you still had relatively strong growth, we were overrunning the money supply targets,
and there was a strong demand for credit in the banks and the
credit markets.
Mr. LOWERY. Mr. Chairman, I have many, many more questions,
but my time has expired.
183
Chairman FAUNTROY. I thank you. And I thank the gentleman
for remaining with us so long. We will begin a second round of
questions. We are going to adhere strictly to the 5-minute rule. Of
course, if witnesses have heard questions that members had already posed, they need not avail themselves of the 5 minutes.
Mr. Neal?
Mr. NEAL. Thank you, Mr. Chairman.
The key question it seems to me now for us is this question of
interest rates. It is certainly the one attracting the most attention
as regards Federal Reserve policy. As I understand the policy established by the Federal Open Market Committee, if you were to
start pumping in reserves now, if you were to start exceeding your
target by any significant amount, wouldn't that have the effect of
raising interest rates, especially long-term rates, as opposed to
bringing them down?
Mr. MORRIS. Yes.
Mr. NEAL. Would
you all agree with that? That is certainly my
understanding. And yet it seems to me there is a lot of debate on
that subject. There are many here in the Congress who think that
the way to bring down interest rates would be to start printing a
lot of money. And I just find that hard to understand. But I think
it is good at least to have it on the record that you say in your
opinion that that would be the result, if we start pumping in the
reserves, that we are going to have not lower interest rates, but
higher interest rates. I believe you all agree.
Chairman FAUNTROY. We had a chorus of agreement.
Mr. LOWERY. Mr. Chairman, as I understand the ground rules, is
silence acceptance?
Mr. MORRIS. I think you are getting unanimous agreement to
that proposition.
Mr. SOLOMON. Particularly if you emphasize as you did long
rates.
Mr. NEAL. I think that is right. Sure, you could artificially bring
down short rates for a while, I guess, until people got wise to what
you were doing.
Mr. CORRIGAN. I think there is a question even as to how long
you could do that.
Mr. NEAL. I think that is true, too. I think you wouldn't get the
short rates down for very long, unless people were making very
short-term decisions to get in and out in a hurry.
But in looking for, which we all are, some way to balance this
program and making it effective, to get us back to a situation
where people are employed and industry is productive, clearly we
need to get interest rates down. To do that, it seems to me the Fed
must continue to exercise restraint, to get and keep interest rates
down. And to sustain that, it seems to me we must have some balance on the fiscal side.
Now, often the answer to that is given, well, what we need to do
is cut spending more. And when we ask people where they want to
cut the spending, they don't want to cut it out of defense, they
want to cut it usually out of other programs. If you don't cut defense, and you are going to cut spending under our system, what is
left is programs that help people and usually they are the most
vulnerable and helpless people in our society. We don't have too
184
many welfare programs for rich people. So usually people disabled,
sick, or trying to promote education, science, energy, that we feel is
in the national interest.
I am left with the conclusion if we are going to add balance to
this program, we are going to have to raise revenues somewhere.
Not that we cannot find areas to cut some spending. We certainly
can. But that we are at least going to have to have a significant
amount of increased revenue into a package to make it a balanced
package. Would you all agree with that? And would that not have
some benefit on credit markets, interest rates, the long-term, beneficial long-term financial outlook for our country?
Mr. Roos. Even though this is out of my province, I would submit
that inevitably if you increase revenues you will find ways to spend
those increased revenues. I still feel that the financial world and
the public generally have to be convinced before increasing revenues to a further extent that every possible effort has been made
to reduce costs. And I think this goes into the military costs. I am
way outside of my field.
Mr. NEAL. I appreciate your comments.
You have to take these things into consideration when you make
your recommendations on monetary policy, also. So you have to
have opinions on it.
Mr. Roos. As the Chairman has said, I think Mr. Volcker has
said repeatedly that the task of the Federal Reserve is lightened by
a reduction of deficit spending. The fiscal end of it certainly does
have an effect on what we do. But we don't have control over that.
And I sometimes wonder if in frustration certain of our colleagues
don't jump on the backs of us poor Federal Reserve officials. And I
say that in a friendly way.
Chairman FAUNTROY. Mr. Paul.
Mr. PAUL. Thanks, Mr. Chairman. Before asking a question of
Mr. Solomon, I would like to make a few comments about the remarks by the gentleman from North Carolina. I believe he made
some very good points about the perceptions of what we are doing
here, and the markets are saying they are not too convinced our
program is all that good. I would have to agree strongly with that.
I think that when we see that next year's budget deficit projected
by the CBO is $175 billion, we are in a lot of trouble.
I would like to suggest it is not beyond our ability to solve it—we
could do it very quickly if we wanted to. I don't think there is
much desire. I would simply cut the budget. And to settle the
squabble between conservatives and liberals, over welfare and the
military, I would just cut $90 billion from each, a $180 billion cut,
and $5 billion to spare. I think the markets would respond favorably. Besides, 60 percent of the so-called defense budget is used for
defending other nations. So I don't think our defense would be injured. I think our defense would be enhanced by spending money
on ourselves rather than everybody around the world.
But I believe the remarks the gentlemen made were very correct
in that our anticipation helps keep real interest rates high. But
this also is the explanation of why gold prices jumped as well. It
isn't the flexibility of gold and the fluctuation of gold. It is this
same anticipation of the future, this same lack of reliance and
trust in the dollar that causes people to rush out to buy gold and
185
do other things. So I would say they are one and the same. Under
the gold standard, that I advocate, we don't have a pegging of gold
prices and we don't have a paper system here in relationship to
gold over there. Gold is money, so you don't have a price of gold,
any more than we have a price of a Federal Reserve note today.
When you see the price of gold go to $850 and sharply drop, this is
the anticipation of the value of dollars that is occurring. It is a
change in the anticipation.
The suggestion was made would we allow no money to be loaned
at more than 2 or 3 percent above the inflation rate, and the reply
was, no, nobody would loan money then. But if someone would
guarantee the return of my investment in terms of gold, if I made
3 percent over the weight of gold and got the weight of gold back, it
would be a very good investment and people would be willing to
invest in that. But they are not willing to invest in a 20-year bond
when they don't know what the interest rates and purchasing
power are going to be. And that is where our main problem is.
The technical question I have for Mr. Solomon has to do with the
statistics showing the reserve bank credit outstanding at the end of
July was $153 billion. Of that, $132 billion were U.S. securities, and
Federal agencies securities of $8 billion. In that list, part of that
$153 billion, there is a $9.9 billion of other Federal Reserve assets.
Can you break that down for me? What is involved in "other Federal Reserve assets" as part of the Reserve bank credit statistic?
Mr. SOLOMON. I cannot break it down for you offhand, but I will
be pleased to do so in a letter. We do hold some bank acceptances
in the portfolio.
Mr. PAUL. That is separate?
Mr. SOLOMON. Yes. That would probably be shown under "other."
But I don't know whether that is the full amount.
Mr. PATMAN [presiding]. Would you provide that letter to the
subcommittee?
Mr. SOLOMON. I would be pleased to do so.
Mr. PAUL. I particularly want to know whether or not the holdings of the foreign bonds are in that particular category.
Mr. SOLOMON. I will supply that information as well.
Mr. PAUL. Could you show me where they appear on a statistic
like this—how much the Federal Reserve holds in foreign bonds?
As an asset?
Mr. SOLOMON. We don't hold bonds outright. When swap lines
are exercised, we temporarily hold foreign currencies, usually invested in the equivalent of U.S. Treasury bills in those countries.
We also hold the foreign currencies that were acquired over the
years from past interventions to counter disorderly foreign exchange markets. Those are also invested, but in relatively shortterm instruments.
Mr. PAUL. Doesn't it appear as asset supplies in the statistics?
Mr. SOLOMON. I am not sure where it is in the accounting sheet. I
think you are right but I don't know exactly what part of it. I will
give you the breakdown.
Mr. PAUL. Thank you.
[At the request of Congressman Paul, the following letter, dated
October 19, 1982, was received from Mr. Solmon:]
186
FEDERAL RESERVE BANK OF NEW YORK
NEW YORK, N.Y. IOO45
AREA CODE 312 791-6173
October 19, 1982
The Honorable Ronald E. Paul
House of Representatives
Longworth House Office Building
Room 1234
Washington, D.C. 20515
x
Dear Congressman Paul:
I am writing in response to the request you made during
my testimony before the Subcommittee on Domestic Monetary Policy
on September 23, for the composition of the "other Federal Reserve
assets" figure shown in the System's Reserve Bank credit data.
As you can see from the enclosed statistical information taken
from the August 1982 "Federal Reserve Bulletin", total Reserve
Bank assets at the end of July were about $154 billion, of which
about $10 billion is shown as "other assets". A table breaking
down the "other assets" account for July is enclosed. You'll note
that foreign currency assets were about $5.4 billion, or over half
the total. To answer your question, holdings of foreign government obligations would be included in this category, and thus in
the "other assets" account.
I also should note that bankers' acceptances do not
appear in the "other Federal Reserve assets" account, thereby
clarifying a remark I made during my testimony. Acceptances are
accounted for as a separate line item, and, as you'll note on the
statement, at the end of July the System held no acceptances.
Please let me know if you have further questions.
Sincerely yours,
Enclosures
187
A4
1.1]
Domestic Financial Statistics D August 1982
RESERVES OF DEPOSITORY INSTITUTIONS. RESERVE BANK CREDIT
Millions of dollars
cekly averages of <5«i!y figm
June 16
June 23
June 30
July 7
Ju)
| July 2 1 '
j u 1y2?r
SUPPLYING RESERVE FUNDS
129.CVS
3
Bouch: outright
t
Held" under repurchase » p « r
5 Federal agency securities.
7
Held under repurchase apeer
11 Other Federal Reserve esvets
12 Gold slock
13 Special craving rights certificate s e a
54 Treasury currency outstanding
1.105
2.167
9.OSS
1.014
2.(64
S.S52
1.231
2.227
8.739
1.616
1.675
9.027
1.07C
1.589
6.57S
11.3*9
3.E1S
13,758
ABSORBING RESERVE FUVDS
l i Currency in circulation
36 Treasury C2Sh holdings . .
rves. »Sib Federal
C RESER\1 FUSDS
< U.S. govemmem vecurilies1
5
Boucht ouirighi
S
Held under repurchase apeemcDls
7 Federal agency securiiics . .*.
B Bouchi ouirighi
?
Helo under repurchase aptemeDii
3 Acceptances
2
T^\\\\\\\\\\\\\\\\\'\''\'\''''\'''
3 Other Federal Reserve assets
4 Gold
Got stock
<
5 Spe,:cia) drawing rights cenificate account...
ouutandinj
lcy
6 T»CJ
12S.56
3.6S7
9.665
9.00!
1.63S
2,545
8.813
1.05S
1.776
£.635
11.X9
3.816
13,767
11,149
3.818
13,781
11.149
3.81S
13,776
11.149
3.618
13.7S1
11.149
3.618
13.781
1.470
2.093
9,175
11.HP
3.818
13.786
Aj&soJiBrNG RESERVE FUNDS
7 Currency in circulation
S Treasury cash holdinp
Deposits, other inaa reserves, with Federal
Reserve Bantu
9
Treasury
0
Foreipi'
1
Other
2 Required clearing balances
3 Other Federal Reserve liabilities and
capital
4 Reserve accounts'
1. Includes securities loaned—fully guaranteed by U.S. government securities
plcdsed with Federal Reserve Banli— and ududa
(i/ any) securities sold and
scheduled to be bought back under matched sale-purchase transactions.
of currency and coin held « r<
11.149
4.01S
13.7&
11.149
4,018
13.786
188
"Other Federal Reserve Assets"
July 1982
Month-end Data
($ millions)
Reserve Bank premises
$
528
Furniture and equipment
164
Other real estate, net
15
Reimbursable expenses and other
receivables
Deferred charges
28
5
Prepaid expenses:
- cost of Federal Reserve notes
-• materials and supplies
- other
38
10
28
Currency and coin exhibits
1
Miscellaneous cash items
28
Accrued service income
28
Suspense Account, general
66
FDIC-assumed indebtedness
459
Foreign currency assets
5,405
Interest accrued
2,881
Premiums on securities
240
Overdrafts
All other
32
*
$?_L?56.
*
Not meaningful.
189
Mr. PATMAN. Gentlemen, I want to read to you an article, part of
an article that appeared in yesterday's Washington Post, on page
D7. It says:
A leading Wall Street economist warned today that the Nation could be plunged
into a depression if the Federal Reserve Board tightens monetary policy again, sending interest rates back up.
Do you agree with that?
[The article follows:]
[From the Washington Post, Sept. 22, 1982]
WOJNILOWER FEARS RETURN TO TIGHT MONEY POLICY
(By Merrill Brown)
NEW YORK, September 21.—A leading Wall Street economist warned today that
the nation could be plunged into a depression if the Federal Reserve Board tightens
monetary policy again, sending interest rates back up.
Albert M. Wojnilower, chief economist at First Boston Corp., also said that the
combination of massive business debt and a hesitancy on the part of major banks to
continue corporate lending could block the economic recovery that administration
officials say is underway.
"It is no longer altogether certain that a moderate business upturn can provide
enough lift to forestall a cascading of bankruptcies," Wojnilower said in an address
to executives attending a business outlook meeting sponsored by the Conference
Board, a private research group.
Wojnilower's remarks on the possibility of a depression came in response to a
question. "If we revert to the kind of monetary policy that prevailed prior to midyear, there will be a depression sooner than later," he responded. Wojnilower's Aug.
16 prediction that interest rates next year are likely to be "noticably lower" for
high-quality investments helped prompt the ongoing stock market rally.
Until then, Wojnilower and Salomon Brothers Inc. economist Henry Kaufman
had been predicting that interest rates were likely to remain high.
Stock market experts suggested today that Wojnilower's remarks were likely to
add to the economic and political pressure on the Fed to maintain an easier policy
toward the growth of the money supply, a key factor in the market's recent boom.
The stock market rally continued today as the Dow Jones Industrial Average
jumped by more than 18 points, hitting its highest closing mark in more than 13
months.
But there was little indication from economists and executives attending today's
economic parlay that they had yet felt the effects of the predicted recovery. In fact,
Albert T. Sommers, the Conference Board's chief economist, said that he does not
expect the economic recovery to begin until late this year.
And at a policy conference here run by The Securities Group, a merchant bank,
several academic economists agreed that a recovery this year is likely to be slow
and limited. "I don't think it's going to be very vigorous,' said one, Stephen Goldfeld, chairman of the Princeton University economics department. "Nobody will be
very happy with it."
Mr. Roos. Mr. Patman, I think that speaking as an individual, if
you took the pronouncements of all of the leading economists who
are quoted in our financial press, and if you go back over the last
10 years and lay them end to end and examine the consistency or
the inconsistency of the way they have viewed the same set of circumstances, you might be a little bit discouraged by the importance of, or disillusioned about the importance of those forecasts. I
certainly do not share that individual s judgment. Of course, I am
only one midwesterner.
Mr. PATMAN. I suppose you are speaking for the panel of five in
that, is that true?
Mr. SOLOMON. Well, I think, as I understood the way you read
that, Mr. Patman, you said, you quote this economist as saying if
the Federal Reserve were to tighten monetary policy.
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Mr. PATMAN. That is right. This is Mr. Wojnilower.
Mr. SOLOMON. He is a very respected economist.
Mr. PATMAN. It really runs contrary to what you said earlier, I
think. "Warned today that the Nation could be plunged into a depression if the Federal Reserve Board tightens monetary policy
again sending interest rates back up/' I think you have been telling us when you tighten monetary policy, you get those rates down.
Mr. SOLOMON. Well, I think Chairman Volcker has explained
what our views are on monetary policy. I don't think that that is a
relevant point. We are following a fairly consistent monetary
policy at the upper end of the range.
Mr. PATMAN. YOU say it is not a relevant point whether or not
tightening monetary policy sends interest rates up.
Mr. SOLOMON. NO. The question was posed, I gathered, that if we
were to tighten monetary policy, the country would be in recession.
I think Chairman Volcker has explained
Mr. PATMAN. I think the recession would be the result of the
tightened monetary policy, if that results in higher interest rates.
Isn't that what he is saying here?
Mr. SOLOMON. From our early exchange, you know my particular
views, which is that short-term rates do respond for a period of
time, along the lines that you indicated; and Mr. Wojnilower has
indicated that in the article. We did not agree on the question of
the long end of the market, that it will be swamped by inflationary
anticipation considerations. But I think at the short end of the
market, for a short period of time, he is correct.
Mr. PATMAN. That interest rates would go up if you tightened
monetary policy? What is he correct about? What is he saying that
is correct?
Mr. SOLOMON. The tightening that he presumably means has to
do with our nonborrowed reserve path. If we feed less reserves to
the banking system, and in that sense we usually mean tighten,
there is a short-term impact in the Federal funds market—an
upward pressure in that market. So in that sense, you are correct,
in my view, that a tightened monetary policy, in the sense of feeding in less reserves, tends to be a major factor, but not the only
factor, in bringing about a higher Federal funds rate and it has an
impact on other short-term interest rates. However, we have very
little control, under our monetary policy, over the long end of the
market.
Mr. PATMAN. SO in the short-term then. But anyway of tightening monetary policy, whether it is by requiring larger reserves or
other means, would result in higher interest rates in the short
term. Is that true?
Mr. SOLOMON. I think that is true, yes, for a period of time.
Mr. PATMAN. All right. We have talked about lenders charging
as much as they can for as long as they can. I think you mentioned
that borrowers will pay as little as they can for as long as they can,
or at least that is my interpretation of it. I appreciate Mr. Boykin's
sentiments that the marketplace is the best place to determine
where the interest rates should be. But isn't the Fed interjecting it
into that relationship of borrower and lender by getting on the side
of the lender and causing these rates to be higher than the borrow-
191
er would otherwise have to pay, especially in the short term, when
it has a tight money policy?
Mr. Roos. I think the Federal Reserve has done more than any
other institution involved in this whole issue in helping to bring
down interest rates. It has done it by reducing the rate of money
growth, thereby bringing down inflation, and thereby long-term
rates will be reduced. I think that anyone who accuses the Federal
Reserve of artifically stimulating or causing interest rates to rise is
mistaken.
Mr. PATMAN. Well, there is something I wanted to comment on
there.
With interest rates the highest they have been in the history of
this Nation as expressed in real terms, would you feel justifiably
the Fed has actually lowered interest rates?
Mr. Roos. I think interest rates are higher than they have ever
been because inflation has been higher and more persistent than it
has been. People have learned to be skeptical about whether indeed
inflation isn't the regular pattern of the economy of this country.
And so as long as they feel that way, they are going to adjust their
economic decisions accordingly, and this means high interest rates.
I don't think that our current policy is responsible for this.
Mr. PATMAN. Would you present us with some further information about this effect of the skepticism of the public and the inflationary expectations of the public, and how that causes higher interest rates in the long run and in our immediate situation, especially in view of the fact that we have very low inflation now, and
yet we have a very high real rate of interest, the highest in the
history of this Nation still.
We have had that now for some time. It seems aside from keeping your eyes on that monetary aggregate target and so forth, that
it would not hurt you to keep an eye on what this is doing to interest rates, the policies on that, and what your interest rates are
doing to the economy of the Nation.
Flattening out the economy by putting people out of work and
putting factories out of work is not the answer, I don't think.
I will perhaps have an opportunity to talk to you again before
this is over.
Mr. McCollum.
Mr. MCCOLLUM. Thank you, Mr. Patman.
Gentleman, I just would like to commend you for your diligence
in the work, interest and obvious dedication you have to what I
think one of you earlier stated is something most people don't understand on the golf course even when they are in the business of
money.
I think coming before us today sometime can be an onerous experience. But I believe you agree most of us up here appreciate it and
appreciate your patience.
I have a question of a more technical nature. But it goes, President Corrigan, to the joint statement and the pricing area that was
dealt with I think in my absence a little earlier. It is one that I
questioned and would like to understand better.
On page 3 of the joint statement you note that the float has been
reduced dramatically since the 1980 Monetary Control Act and
that "This reduction has increased our payments to the U.S. Treas-
192
ury by about $350 million/' I think I understand what float is. But
for the record, I want to ask three or four questions.
I would like for you to explain what float is, why it is important
to reduce it to zero, who benefits from the float and who loses, and
how does the reduction of float translate into more money for the
U.S. Treasury. That is basically a five-part question, but it all probably comes down to the same thing.
Mr. CORRIGAN. Let me try and tick them off quickly. First of all,
there are many different kinds of float. Our concern here is with
Federal Reserve float. In a technical sense, Federal Reserve float is
checks in the process of collection.
If we credit a bank for a check that is deposited with us before
we debit the payor bank, the bank that the check was ultimately
drawn on still has the use of that check's money, and thus a float,
in the Federal Reserve sense, is created. There are many other
types of float as well. And indeed those other types of float, in the
aggregate, are a lot bigger than Federal Reserve float.
But it is true that Federal Reserve float has a kind of special interest to us, and indeed to the Congress and to the Treasury, because when we create Federal Reserve float in the way I just described, we in effect end up treating that float as an asset. That is
part, I think, of the missing ingredient of Mr. Paul's earlier question. To the extent that float credit is extended in the way I just
described goes up, we have to make an offset on our balance sheet.
And the offset, at least in a behavioral sense, is: the more float we
have, the fewer Treasury securities we hold. The fewer Treasury
securities we hold, obviously the less of our income on those securities we can pay back to the Treasury. So when we reduce float
from $4.9 billion to $1.5 billion, as indicated in the statement, other
things being equal, our holdings of Government securities go up by
an according amount, and our payments to the Treasury therefore
go up by—in round numbers—the $350 million I referred to. That
is kind of what float is, and that is how it bears on the payment to
the Treasury.
The other question that you raised was, "Why be bothered about
it, who benefits from it? The "why be bothered I think basically is
an efficiency question. Quite apart from whether it is Federal Reserve float or somebody else's float, the mere presence of float is
symptomatic of an inefficiency in the payments process. We want
the payments process to be as efficient as it can be. Potentially,
and at the extreme, it can also even be a source of some risk in the
payments process. So from a risk and efficiency point of view, I
think it makes sense to have less float rather than more.
Mr. MCCOLLUM. What is the risk you are referring to?
Mr. CORRIGAN. In a very extreme case, if you have checks in the
process of collection and a corporation that issued the checks goes
bankrupt, who ends up holding the bag? That is one example; there
are others like that.
Who benefits? That is a marvelous question. It is extremely difficult from an analytical point of view to answer that question. We
do know that, for example, that payments practices that individuals or corporations may follow are in some cases, designed to produce float. But the net benefactor is awfully hard to identify. Is it a
bank? Maybe. Is it a customer? Maybe. Which customer? It is very
193
difficult. And that is why the approach we have taken, in trying to
respond to the requirementof the Monetary Control Act about float
is to get rid of it. We attempt to eliminate float rather than simply
to try and explicitly price it. We feel analytically, given the uncertainties about who really does benefit, that by forcing it out of the
system you come closer to getting the incidence where it belongs.
Mr. MCCOLLUM. If we could do as good a job in Congress with the
broad big picture of getting things under control as you are trying
to do with your efficiency housekeeping in the float area, I think
we would not have the problem with the interest rates.
I again commend all of you. I appreciate your coming here.
Mr. PATMAN. Mr. Weber.
Mr. WEBER. Let me just get back into the discussion of economic
policy. I don't want to belabor the point.
Let me say that I am not one to necessarily give in on that point.
I believe that a policy that looks toward the continued growth of
Federal spending and reduction in Federal tax rates, reduction in
the regulatory burden, and a stable monetary policy is a good one.
The problem is that we don't necessarily have a budget that
gives us that kind of a policy. We have got the best budget we
could put together, though, that would pass. And the only signal I
was receiving back in those budget hearings from the financial
community was balance the budget. And some of us did vote for a
balanced budget. It failed by 36 votes.
Some of us, a majority of the Congress, have voted for a balanced
budget constitutional amendment. And many of us I think have
signed a discharge petition to get that brought out on the floor. But
we don't see it happening.
What I come back to are the words of Bob Michel a week or so
ago, I think that Reaganomics is going to play better than Tiponomics. We have been forced into a situation of having to settle for
the best that we could get, which to my way of thinking was the
lowest rate of Federal spending, the lowest rate of taxation, the
lowest deficit of those budgets that came before us back in June.
With that for the record, let me get back to the problem that we
discussed earlier, and I think it really comes back to what Mr. Solomon was discussing. What is the linkage between inflation and
unemployment? You know, the American public has a perception,
maybe a misperception, that if we only had more inflation, we
would have more people at work. Is inflation destructive of jobs or
is it constructive of jobs?
Really that is a message I think that has to get to the American
public. Could you elaborate again, Mr. Solomon, perhaps take the
lead on that question.
Mr. SOLOMON. Well, I think that the history of the last 15 years
has shown fairly clearly that the inflationary process so distorts investment decisions as well as consumer spending habits that it
tends to set up a situation where periods of recovery are much
shorter than they otherwise would be. The history of inflation in
other countries shows that to keep employment at relatively high
levels, there has to be more and more inflation. There is no such
thing based on historical experience and worldwide experience, as
10- or 15-percent inflation over a few years and still maintaining
the high employment.
194
You can get into a situation where, if your short-term consideration is employment levels, if you are worried only about the shortterm impact, you have to punch out more money. But you cannot
stop at a certain level. You have to keep raising the growth rate
more and more. This would be very damaging to the fabric of our
society. I cannot imagine over the long run a more serious way of
weakening the democratic fabric of the society. That has been
shown in other countries as well.
In earlier periods of time, before we permitted monetary and
fiscal policy to get so loose, relative to what the objectives were, we
did find in the earlier postwar period that we could run fairly sustained levels of relatively full employment with very modest rates
of inflation, almost fractional inflation—1.5 percent, most of the
first 7 years or so of the 1960's. The initial mistake was made, I
think, in President Johnson's administration, in which I served,
when he delayed too long in asking for additional tax revenues to
finance both the Great Society program and the Vietnam war—you
know, the famous guns and butter policy. The situation did not get
corrected through a sufficient tightening of monetary and fiscal
policy. It then created a wage spiral and inflationary response, and
slowly over the years we have had a significant worsening, though
it has become a little lessened in the last year, of deeply entrenched habits of how to respond to inflation.
The average citizen, average member of a trade union, average
businessman, has certain clear conceptions of just keeping themselves up, not even getting ahead of anybody else, and just keeping
up results in a worsening of the inflationary spiral. We have seen
the consequences for employment.
So that I myself do not see any alternative if we are looking at,
as I think we all should be, the question of what is best for our
country over the long run, not simply the next few months. I don't
see any alternative but a sense of consistent discipline that applies
in the fiscal area as well as the monetary. The financial markets in
New York are not expecting a perfectly balanced budget. You can
have a modest amount of deficit spending, which increases in recession and decreases in recovery, and still not awaken inflationary
expectations. But of course the size of the budget deficit that we
are looking forward to, that everybody is expecting, even assuming
modest recovery, is very disconcerting. And it is true, as some of
my colleagues have said, that that is probably a very major factor
in correcting the very stubborn inflationary expectations that have
been built up over 15 years, and have been shaken somewhat in
the last 2 years. But I am afraid that we have somewhat longer to
go.
Mr. WEBER. Thank you.
Mr. PATMAN. Mr. Lowery.
Mr. LOWERY. Thank you, Mr. Chairman.
I will try to synthesize all these questions into one.
I would like each of you to respond.
If you were king for a day, total economic czar, the Chairman of
the Federal Reserve Board, the Board of Directors, the President of
the United States, the Secretary of Treasury, Director of OMB, and
the House and Senate all combined, what specifically would you do
to bring interest rates down and improve the economy?
195
Mr. Boykin.
Mr. BOYKIN. Well, I just never have visualized myself in that
role. I will have to think a minute.
I would first of all, and this has been alluded to, vote to bring
about a fiscal policy to where we could have the right kind of balance between monetary and fiscal policy. I would recognize that it
would take some time for this to translate into real sustainable
growth in the economy, and then I would hope I would have some
patience and let that work its way through. This would put the
country in the kind of environment where we could go forward
with some assurance that we would not be encountering these
problems in the near term.
Mr. LOWERY. How does that differ from where we are now?
Mr. BOYKIN. Reference has been made to the size of the projected
Federal deficit. Chairman Volcker has said that the deficit does
make it more difficult for us the larger it is, and places a greater
burden on monetary policy.
Mr. LOWERY. SO the balance you measure is in terms of the size
of the deficit.
Mr. BOYKIN. Basically, yes.
Mr. LOWERY. Mr. Corrigan.
Mr. CORRIGAN. May I just make a quick analytical point. Look at
this deficit. Let's not quibble about whose number is right. Let me
use around $150 billion as a point of discussion. A major part of
that deficit, of course, reflects the condition of the economy right
now. Underneath that there is a structural deficit. It is hard to
know exactly which part of the deficit is in fact structural. But
again, for purposes of your question, let me assume that it is
roughly two-thirds/one-third: the structural, underlying deficit is
$60 or $70 billion in that area.
Now if I had all those powers that you mentioned, I would cut
Government spending by the amount of the structural deficit,
whatever it is, just like that. Having done that, I suspect that I
would also look for monetary growth targets that would even be a
little lower than the ones we have right now, because in a context
in which you have really dealt with the deficit problem, I suspect
that you might in fact want even a little less money growth than
we have ticketed for 1983, right now.
Mr. LOWERY. Mr. Roos.
Mr. Roos. If I were king for a day, after shipping my wife and
children overseas for protection, I would first of all take action to
try to achieve monetary growth as presently targeted at the upper
ends of our targets for this year. I would reduce that rate of monetary growth by approximately 1 percent in each succeeding year,
until it was close to zero. I would reduce Federal spending to the
point where the Federal deficit was significantly reduced. I would
get on the airwaves and I would tell my subjects that these steps
have been taken, that they will not achieve overnight results, but
they represent the only and the best future for this country. Then,
after pulling the telephone line out of the wall, I would probably
walk with Mr. Corrigan to the corner saloon and have a nice evening.
Please don't appoint me king.
196
Mr. CORRIGAN. Yes, because I would have to go to the saloon
with you.
Mr. SOLOMON. We all seem to have fairly orthodox views here.
The common denominator here is we don't believe there is a magic
fix to get interest rates down. Therefore, as I indicated earlier, I
would want to see the Federal deficit reduced to levels whereby in
recovery periods it approached balance.
Mr. LOWERY. Could you be more specific as to the level of the
Federal deficit?
Mr. SOLOMON. I don't know if the actual level would be significant now. But I would guess that I probably wouldn't differ too
much from Mr. Corrigan's views, that possibly one-third is structural, in the sense that in a recovery period the remaining twothirds would be eliminated just by the recovery of the economy. I
don't think the fine-tuning is as important as the psychological
impact, which would be enormous, absolutely enormous, if people
had confidence in this—that it would work.
However, I am not sure that I would reduce the monetary targets. I would want to look at that carefully. I certainly think it
would deserve some careful consideration, the possibility of some
further modest reduction. But I would not want to do that in an
automatic way. There is a difference of view, as you gather, between Mr. Roos and myself on an approach such as that. Although
we both share the view that excessive money growth does complicate our problems.
Having said all that, I would do something which is somewhat
less orthodox, which is that I would then invite to a conference, if I
could get a consensus in these areas which I think are the critical
areas, the key labor and business leaders, because I think some of
the pains of the disinflation process would be substantially reduced
if one did have cooperation from labor on wage restraint. You
would have more employment. There is no question about it. And if
labor were convinced that this was an overall comprehensive program for the economy to recover, not just for interest rates to come
down, but for higher employment levels, there might be sufficient
credibility in such a program to enlist their cooperation. That has
been done successfully in other countries.
After all, Japan and Germany basically run a very successful
program of getting labor cooperation, because labor in those countries is convinced that fiscal and monetary policy will move in the
same direction on the whole. There are periods of time when that
is not true, but on the whole, there is a sense of confidence there. I
think that that helps enormously in the process. So I would use all
those methods.
I think the main proposals of a program which is designed to
achieve what you are implying, by lowered interest rates, namely
higher levels of investment and economic activity—all require a
more stable price system.
Mr. LOWERY. Mr. Morris.
Mr. MORRIS. If you still want another king's judgment, I think
quite clearly what this country needs is a strong investment boom
so that we can increase productivity and increase the real income
of the American people. The average American citizen has seen his
real income on a treadmill now for 10 years. To do this we need to
197
do two things. First, we need to get the cost of capital down, by
that I mean the cost of equity capital and the cost of long-term
debt capital. To do this, we need to continue to follow a restrictive
monetary policy, one that gives confidence to the long-term investor that his investments are not going to be eroded by inflation in
the future. We also need to reduce the share of the savings pool
being absorbed by the U.S. Government.
So I would choose to get about a $100 billion reduction in the
deficit for the next fiscal year. I would try to get half of that out of
the expenditure side. To do that you have to go where the money
is, and the money is not in programs for the poor people of this
country—that has been pretty well gone over by this Congress, it is
in the entitlement programs for the middle class, and the military
budget. It seems to me that Congress has got to face up to the prob%ns of social security and related entitlement systems,, not for the
poor, but for the middle class.
The other half I would get out of a tax increase oriented in a
way which would not reduce the incentives for savings and investment. In this sense, you can call me a supply-sider I suppose. So I
might want to take a look at a value-added tax and/or a tax on
imported oil to find the other $50 billion.
Mr. LOWERY. Thank you, gentlemen, very much, for your
thought-provoking testimony.
Thank you, Mr. Chairman.
Mr. PATMAN. Thank you.
Mr. Weber brought up a good topic, and that is the balanced
budget amendment. I certainly appreciate Mr. Weber's sentiments
about the Reaganomics. I would like to see it work very well, and
the supply-side economic theory work very well.
I just don't want them to slide off into Reaganmortis.
Tell me, do you support the balanced budget amendment?
Mr. CORRIGAN. Conceptually, in this very difficult situation we
are facing. One has to, I suppose, find a certain attraction for the
concept. But once you get beyond the concept, I will confess to
some uneasiness about it, and the uneasiness I have come on two
fronts. One is that under the best of circumstances, it would take
some time to get it done, and therefore it could become an excuse
for not doing anything in the meantime and that is a danger. That
I think is something that we have to guard against almost at all
costs.
The second source of uneasiness I would have is that we want, I
think, something like that to at least have a measure of flexibility
built into it, because, as I think Mr. Solomon has said very eloquently, there is no such thing as a right budget number for every
year. You have to take account of the economy and other things.
Thus you need flexibility. But in an effort to build in flexibility, do
you construct a balanced budget amendment that is transparently
not going to work?
Now, in the current version I believe the effort to get flexibility
has been couched in terms of I think the 60-percent override rule.
At least that is the last version I saw. I don't know if that achieves
the flexibility goal, it could. But I suspect that it also entails some
risk in terms of achieving it in a way that won't produce the
bottom line result that we are after.
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Mr. PATMAN. That will affect your monetary policy in the Fed,
will it not—the balanced budget amendment.
Mr. CORRIGAN. I don't think it would be fair to say it would
affect it in a direct way, that it would necessarily produce an overt
change in monetary policy. If you produce a balanced budget
through whatever device. I think, for example, in that setting, you
would see a very substantial prospect for falling long-term interest
rates. So monetary policy in some sense could look quite different.
But I don't think it necessarily has to follow that the core and essence of policy would necessarily be different.
Mr. PATMAN. Anyone else care to make a comment for or against
the balanced budget amendment?
Well, we have talked about the monetary aggregates in the marketplace, and interest rates, and you are thinking about whether
injecting sums of money into the money supply available to thr
public will cause higher interest rates in the long term and short
term. My concern is we just seem to be in a situation where the
Fed is going to find some excuse for keeping interest rates high,
regardless of—whether it is because we have inflation or whether
it is because we have large deficits or something of that type—are
there going to be some strong incentives for the Fed to bring interest rates down?
Or do you just feel like it is completely out of your control, even
though you are tinkering with this money supply all the time?
Mr. Roos. I think the record has shown the current Fed policy
has significantly brought interest rates down. If we stick by the
broad policies to which we are presently dedicated, I would think
that long-term interest rates would continue to decline.
Mr. PATMAN. YOU are speaking about nominal interest rates, or
the interest rates that the consumers pay, but not the real interest
rates.
Mr. Roos. I think the nominal and real interest rates would all
be reduced accordingly. I think real interest rates will come down
even more when the credibility of monetary policy supplemented
by a credible fiscal policy sinks into the public.
But basically, I think, Mr. Patman, that possibly you are underestimating the significant progress that has occurred in recent
months in a reduction in interest rates. I think if we continue the
course we are on, those rates will not only stay down, but they will
decline even more.
Mr. PATMAN. IS a large part of that a result of our having a very
significant economy at this point, as Mr. Wojnilower states—likely
to slide off into a depression if the interest rates go back up because of the Fed's tight money policies, or as he says, "If we revert
to the kind of monetary policy that prevailed prior to midyear,
there will be a depression sooner rather than later."
He says also it is no longer altogether certain that a moderate
business upturn can provide enough lift to forestall a cascade of
bankruptcies.
Do you feel those conditions are the result in part of the Federal
policy or completely outside?
Mr. CORRIGAN. Those conditions, unfortunately, Mr. Patman, are
one of the very, very insidious results of a 15-year period of inflation. The phenomenon that I believe Mr. Wojnilower is referring
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to, for example, in terms of some liquidity strains that problem we
see in businesses—a very sizable part of that is indeed the result of
a process over a long period of time in which it was so easy for
people and businesses to borrow, to leverage up. Because as as that
inflation was there, and as long as that inflation was accelerating,
they could simply paper over their mistakes with higher prices.
Now, there is unquestionably a corrective process associated with
all that. But it is not something that would go away in the context
of more inflation. Indeed it would get worse.
Mr. PATMAN. There is a concern of the banks lending money to
foreign governments by charging their good customers higher interest in order to make up the money for the bad loans. Is that possible?
Mr. SOLOMON. I don't think so, Mr. Chairman. The situation has
^een characterized by very intense competition among banks all
around the world to lend to countries that had a need of resorting
to the capital markets.
Mr. PATMAN. For which they could also make substantial profits?
Mr. SOLOMON. Definitely, no question about it. The fact that
some of these loans are in difficulty pending those countries
straightening out their finances has not, in my opinion, resulted in
higher spreads to domestic borrowers. Typically, we look very carefully at the spread between the cost of funds to the banks and the
average rate at which they are lending. The prime rate is not a
good guide in today's markets. If you look at the actual spread, you
will see that it has tended down for a couple of years, and has gone
up in the last few months somewhat. But that still tends to be on
the average somewhere in the neighborhood of 200 to 250 basis
points, which covers various costs as well as profit.
I don't see any evidence at this time in the behavior of the
spread that would tend to substantiate or support that statement
that you quoted from.
Mr. PATMAN. Of course part of their cost of borrowed funds, or
part of their expenses of operation would be the balance they have
to charge off.
Mr. SOLOMON. That implies a cartel-like approach which I don't
think is really feasible in today's climate. We have 14,000 banks in
this country, and many of them would like to expand their loan
portfolio if they had customers who could afford to pay their rates.
The rates are more in relation to the cost of funds, and at least so
far we have not seen any evidence of the domestic interest rate
spread rising because of the trouble in the foreign area.
Mr. PATMAN. Were the high interest rates charged these borrowers, like Poland and Mexico, contributing factors to the subsequent
poor quality of the loans?
Mr. SOLOMON. Those foreign countries who were considered top
creditworthy, didn't pay any more money than domestic borrowers
would. Money is fungible, and when there is a 20-basis-point movement in our markets, you will see that reflected in the Eurodollar
markets.
Mr. PATMAN. A lot of people feel rates they have been charged
here have been pretty punitive. As witness people trying to run International Harvester, Chrysler, some of these other companies,
that are practically on the ropes now.
200
Mr. SOLOMON. Correct. That has to do with the general conditions we have talked about.
Mr. PATMAN. Maybe those folks have been just too critical of the
situation. There is a widespread belief among the business community that rates have been very high.
Mr. SOLOMON. I think they have been high.
Mr. PATMAN. What you are saying is these folks overseas, like
Poland and Mexico, just pay the same rates everyone else pays.
Mr. SOLOMON. Correct. But what we see is that with countries,
just like domestic borrowers, weaker foreign borrowers have to pay
higher spreads—whereas the very creditworthy borrowers abroad,
like the creditworthy borrowers here, get the advantage of a lower
spread.
Mr. PATMAN. Thank you very much.
We will ask unanimous consent that the record remain open in*
order that members can pose questions in writing to the panel.
I will forego any questions I have if you are satisfied you have
expressed all your thoughts to the committee you would like to express at this time.
Mr. SOLOMON. We have had a very fair hearing. Thank you, sir.
Mr. PATMAN. Thank you very much.
[Whereupon, at 1:30 p.m., the subcommittee was adjourned.]
[The following letter, dated October 7, 1982, was received for inclusion in the record from witness Frank E. Morris:]
201
FEDERAL RESERVE BANK
OF BOSTON
FRANK E. MORRIS
7IO-32I-I435
October 7, 1982
The Honorable Walter E. Fauntroy
Chairman
Subcommittee on Domestic Monetary Policy
Committee on Banking, Finance and
Urban Affairs, Room 109
United States House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
Among the questions you asked be discussed at the
September 23 hearings was the Bank's involvement with
community...activities," including "work training (and)
upward mobility programs."
As Chairman of the Tri-Lateral Council on Quality
Education and Vice Chairman of the Boston Private Industry
Council, I have been part of a group of business and
university leaders working with the Boston Schools
Superintendent on a program to improve the city's high
schools and assure jobs for qualified school graduates.
I thought you might be interested in the enclosed articles
from The Boston Globe and the Christian Science Monitor
describing the fruit of our efforts.
Under the terms of the Boston Compact the leaders of the
business community agree to sign up 200 firms, each of which
will agree to set aside a portion of their available entrylevel jobs for prepared high school graduates; the school
leadership, in turn, pledges to prepare young people for
those jobs as part of a broad high school improvement effort.
We expect many of the jobs will also include opportunities
for further education.
If you or your staff want further information, please
let me know.
Sincerely yours,
Frank E. Morris
Enclosure
202
20
i HE BOSTON GLOBE
THURitt
Founded 1872
h Chairman of the Board oild P'
IOM • ^ WINSHIP Editor
MARTIN K NO1.AN. Edi'.o
R1CHAKD C. OCKKRBl.OOM. ExtfeuMue V.P.
DAVID STANCER. Senior V.f . Business Mam
ARTHUR KINGSBURY. V.P . Treasurer
MHXARD G. OWEN. V.P. Marketing & Soli's
KOHKRT I
Edi 11
.JOHN S. DRISCOU.. f.xeci. ii
MATTHEW V. STOKIN, Mau
MICHAKl C. JANKWAY. Mcii
ROBEWT t,. HE.M.Y Associat
The Boston Compact
The announcement yesterday of ratiiiea'lon
of the Boston Compact - an agreement between
Boston's public schools and leaders- of Boston s
business community designed io improve the
performance of the school system and to to ,tr>r
the hiring of graduates of that system - is s
good a piece of news as the city has received in
some time.
The agreement commits the school system
to making systematic and measureable improvement in Its high schools In attendance,
graduation rates and basic achievement scores
and to report regularly on its progress school
by school.
The agreement signals to students in Boston's high schools that regular attendance, reasonable achievement and graduation wiU be rewarded; It promises students that if they perform In high school they will be given priority
in the filling of entry-level Jobs In Boston busi
nesses that have a career ladder.
Perhaps the most notable aspect of the
agreement, however, Is that it broadens and
strengthens the cc istttuency for public education in the city.
With the signing of the Compact, the business community, at least nominally involved in
the schools since the onset of desegregation,
has substantially increased its participation.
That Is not purely altruistic. ^Vmographi':
changes >*re reducing the number of young
workers md thaf makes it imperative for em
plovers tnat all who Join the work force have
the skills necesssary to perform en*ry level
jobs. If business can define the skills it new Is
and the schools can in turn graduate studenfr
capable of acquiring them, employers wiU iv
the beneficiaries.
Universities in the city, notably UMass and
Boston University, have signaled, by working
on the design of the Compact, that they will
participate constructively in efforts to upgrade
the system.
The city itself Is a party to the compact. At
7:30 tonight, Mayor White is scheduled (o
speak to the annual meeting of the Citywu'e
Education Coalition at the Kennedy Library.
He will presumably u?/» the occasion to ai'-'un
his support for I'nr schools, support he si,.:
nailed recently by sponsoring a $6-miilicn supplemental appropriation for the system.
All this is terribly important. As ',v.-.blnschool enrollment has declined, as the ptibli*
schools have become increasing the schools of
children of poor and near-poor families, tin
threat that the schools might be effectively
abandoned has mounted. Now, however, they
have major institutional allies.
Almost three years ago. at his inauguration.
White made what seemed to some at the tin-wan impossible pledge. He proposed to guarantee
a Job to every graduate of Bostons public hi^h
schools who wanted one. In fact in a labor market that has about 25,000 young workers, t he
redeeming af that pledge to the 1000 or so pub
lie high school graduates who seek work each
year is not impossible. The Boston Compact
provides the mechanism which could make it a
reality in the next several years.
Further, a broad-based commitment to the
schools enhances the prospect that the quality
of education offered by the schools win improve
for all students, including those bound for col
'ege, und that a whoie new spirit could pervade
(he beleaguered public schools. The fact thn«
the mayor and business leaders are willing to
join hands with the schools suggests that, they
have new confidence in the system.
An historic obligation of ail cities, includinj;
Boston, has been to provide an environment for
social mobility, to provide widening vistas ol
opportunity for those in the lower economic
strata of society. Improvement of the public
schools is essential if itoston is to continue to
meet that obligation. The Boson Compart represents a substantial opportunity to make I he
required improvement.
i
I'HEHOSTONCtLOnii
A 'compact' to provide jobs to Boston graduates
SUPT. SPILLANE
44
... a chance for a job out there'
• COMPACT
Continued from Page 1
a School Department hearing room signaled a new amity between City Hall and
the School Department, groups*that have
battled over school spending for three
years.
White is expected to elaborate on his
views regarding relations between the
city and the School Department at a
speech tonight at the Kennedy Library.
White was the leadoff speaker at yestcixtey s conference.
Other speakers were John LaWare.
chairman and chief executive officer of
the Shawmut Bank: William Edgerly.
chairman and chief executive officer of
the State Street Bank and Trust Co.: Boston University president John R. Silber
and School Committee President Jean
Sullivan McKeigue.
LaWare identified the key to the business commitment as a promise to set
linn to initiate the compact goals, starting
aside a percentage of entry-lev<-! jobs
clerical and computer programming slots. with appointment of a coordinator at
for example - for Boston high school $24,000 a year and a placement specialist
graduates. The business community ex- at the Humprhey Center at $30,000.
pects to recruit 200 firms to join in the
Plans call for hiring attendance clerks
Job-placement effort. LaWare said.
in all high schools at a total cost of
For the School Department's part of $240,000 and two additional teachers to
the pact. Spiliane said, high schools will expand an existing Job Collaborative probe required to produce annual reports de- gram from three to five high schools.
tailing student attendance, achievement
Immediate goalsforbusiness members
and placement.
of the compact include signing up 200
In addition, the department will evalu- employers, providing Jobs for 400 gradu
ate high school headmasters on the basis ates next June and stepping up the city's
of their achievement of prescribed goals summer Jobs program by at least 33 per
and their cooperation with the range c! rent.
agencies offering services to the schools.
Sponsors of the compact said the proThe compact also specified SpiHane's posal would require a broad-based and
intention to "seek agreement with the flexible organizational structure to shift
Boston Teachers Union on contract modi- the plan from paper to reality.
fications which reflect the reality «»f the
That document cited reasons for failschool system, provide stability for fearh- ure of past collaborative efforts. The plan
ers and focus on direct educational bene- ners noted the weaknesses of "top-down
fits."
planning that does not involve the teachThe department has set aside S3.5 run ers and administrators." failure to ana-
lyze and build upon prior or existing re
form efforts, "inadequate understanding
of the overall political and cultural environment of the system" and failure ladlftplement educational strategies that WM
proved successful elsewhere.
The compact's planning group e
lished task forces to work on each fl
areas in which schools, businesses,1
leges and universities and cultural
other agencies can help the s< hoofe; _^__ _
seling. alternative education, retnǤiai' *'
education, the arts, athletics. curricuMim
development, career and vocational *lu- '•
cation, computer Miera^y. research |pd_ jJ
evaluation and school-management as^* "'
sistance.
"For the first time, we have a critical
mass of people who are willing to help." ,
said William Spring, head of the TrilaW»
al Task Force, a coalition of local bfsj$*
nesses th^t has been working with At?
Boston schools for several years.
@FedFRASER