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TO EXTEND THE AUTHORITY OF THE FEDERAL RESERVE
BANKS TO PURCHASE U.S. OBLIGATIONS
DIRECTLY FROM THE TREASURY
HEARING
BEFORE THE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
NINETY-SECOND CONGRESS
F I R S T SESSION
ON
H.R. 7632
A B I L L TO AMEND SECTION 14(b) OF T H E F E D E R A L R E S E R V E
ACT, AS A M E N D E D , TO E X T E N D F O R TWO YEARS T H E AUT H O R I T Y O F F E D E R A L R E S E R V E BANKS TO P U R C H A S E U.S.
OBLIGATIONS D I R E C T L Y FROM T H E T R E A S U R Y
S. 1700
AN ACT TO AMEND SECTION 14(b) OF T H E F E D E R A L R E S E R V E
ACT, AS A M E N D E D , TO E X T E N D F O R TWO YEARS T H E AUT H O R I T Y O F F E D E R A L R E S E R V E BANKS TO P U R C H A S E U.S.
OBLIGATIONS D I R E C T L Y FROM T H E T R E A S U R Y
J U N E 15, 1971
P r i n t e d for the use of the
Committee on Banking and Currency
63-356
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1971
COMMITTEE ON BANKING AND CURRENCY
WRIGHT PATMAN, Texas, Chairman
WILLIAM B. WIDNALL, New Jersey
WILLIAM A. B A R R E T T , Pennsylvania
F L O R E N C E P. DWYER, New Jersey
LEONOR K. (MRS. JOHN B.) SULLIVAN,
A L B E R T W. JOHNSON, Pennsylvania
Missouri
J. WILLIAM STANTON, Ohio
H E N R Y S. REUSS, Wisconsin
BENJAMIN B. BLACKBURN, Georgia
THOMAS L. ASHLEY, Ohio
G A R R Y BROWN, Michigan
WILLIAM S. MOORHEAD, Pennsylvania
LAWRENCE G. WILLIAMS, Pennsylvania
R O B E R T G. STEPHENS, JR., Georgia
CHALMERS P. WYLIE, Ohio
F E R N AND J. ST GERMAIN, Rhode Island
MARGARET M. H E C K L E R , Massachusetts
H E N R Y B. GONZALEZ, Texas
P H I L I P M. CRANE, Illinois
JOSEPH G. MINISH, New Jersey
JOHN H. ROUSSELOT, California
RICHARD T. HANNA, California
STEWART B. McKINNEY, Connecticut
TOM S. GETTYS, South Carolina
NORMAN F. L E N T , New York
F R A N K ANNUNZIO, Illinois
BILL A R C H E R , Texas
THOMAS M. REES, California
BILL F R E N Z E L , Minnesota
TOM BEVILL, Alabama
CHARLES H. G R I F F I N , Mississippi
JAMES M. HANLEY, New York
F R A N K J. BRASCO, New York
BILL CHAPPELL, JR., Florida
EDWARD I. KOCH, New York
WILLIAM R. COTTER, Connecticut
P A R R E N J. MITCHELL, Maryland
PAUL NELSON, Clerk and Staff Director
CURTIS A. PRINS, Chief Investigator
B E N E T D . GELLMAN, Counsel
JOSEPH C. LEWIS, Professional Staff Member
GARY TABAK, Counsel
OEMAN S. FINK, Minority Staff Member
<n)
CONTENTS
Text of—
H.R. 7632
S. 1700
P«*«
1
1
STATEMENT OF
Volcker, Hon. Paul A., Under Secretary of the Treasury for Monetary
Affairs
2
ADDITIONAL INFORMATION SUBMITTED FOR THE RECORD
Yolcker Hon. Paul A., submission of table *'Direct Borrowing from Federal Reserve Banks, 1942 to date"
(HI)
4
TO EXTEND THE AUTHORITY OF THE FEDERAL
RESERVE BANKS TO PURCHASE U.S. OBLIGATIONS
DIRECTLY FROM THE TREASURY
T U E S D A Y , J U N E 15, 1 9 7 1
H O U S E OF REPRESENTATIVES,
COMMITTEE ON BANKING^AND CURRENCY,
Washington, B.C.
The committee met, pursuant to recess, at 10:05 a.m., in room
2128, Rayburn Office Building, Hon. Wright Patman (chairman)
presiding.
Present: Representatives Patman, Barrett, Sullivan, Ashley,
Gonzalez, Minish, Hanna, Annunzio, Brasco, Chappell, Mitchell,
Johnson, Brown, Williams, and McKinney.
The CHAIRMAN. The committee will please come to order.
Today the committee holds hearings on H.R. 7632 and S. 1700,
which would extend for 2 years, from July 1, 1971, until June 30,
1973, the authority of the Federal Reserve banks to purchase U.S.
obligations directly from the Treasury. This direct purchase authority
was initially enacted during World War II, and has been extended on
a temporary basis ever since that time. The main purpose of that
legislation is to allow the Treasury Department to borrow directly
from the Federal Reserve banks on a very short-term basis during the
period just prior to tax payment days, and as a standby authority to
provide an immediate source of funds in the event of a marked
disruption.
(The text of H.R. 7632 and S. 1700 follows:)
[H.R. 7632, 92d Cong., first sess.]
A BILL To amend section 14(b) of the Federal Reserve Act, as amended, to extend for two years
the authority of Federal Reserve banks to purchase United States obligations directly from the
Treasury
Be it enacted by the Senate and House of Representatives of the United States of
America in Congress assembled, T h a t section 14(b) of t h e Federal Reserve Act,
as amended (12 U.S.C. 355), is amended by striking out " J u l y 1, 1 9 7 1 " »and
inserting in lieu thereof " J u l y 1, 1973" and b y striking out " J u n e 30,11971"
a n d inserting in lieu thereof " J u n e 30, 1973".
[S. 1700, 92d Cong., first sess.]
AN ACT To amend section 14(b) of the Federal Reserve Act, as amended, to extend for two years
the authority of Federal Reserve banks to purchase United States obligations directly from the
Treasury
Be it enacted by the Senate and House of Representatives of the United States of
America in Congress assembled, T h a t section 14(b) of t h e Federal Reserve Act,
as amended (12 U.S.C. 355), is amended b y striking out " J u l y 1, 1971" and
inserting in lieu thereof " J u l y 1, 1973" and by striking out " J u n e 30, 1971" and
inserting in lieu thereof " J u n e 30, 1973".
Passed t h e Senate M a y 13, 1971.
Attest:
FRANCIS R. VALEO,
Secretary.
(i)
2
The CHAIRMAN: AS indicated in the document sent to the members
of the committee on June 10, the Treasury has used this authority
very sparingly since 1942. The maximum number of days that the
authority was used at one time was 28 days in 1943. Other times
the authority has been used only for 1, 2, and 3 days.
Also it is indicated in the memorandum sent to the members on
June 10, that if time permits the committee will meet immediately
after the hearing to mark up this legislation.
To the best of my recollection, at one time there was no limit on
this amount. But later, on I think we put in $5 billion. We commenced
by putting in $5 billion, and we have extended it every 2 years since.
Mr. Volcker, we are glad to have your testimony. You may proceed
in your own way.
STATEMENT OF HON. PAUL A. VOLCKER, UNDER SECRETARY OP
THE TREASURY POR MONETARY AFFAIRS
Mr. VOLCKER. Thank you. I have a short statement here that I
will read, with your permission, Mr. Chairman.
I appreciate your scheduling H.R. 7632 for prompt consideration,
and I am happy to appear in support of this proposed legislation.
As you have indicated Mr. Chairman, the bill would extend until
June 30, 1973, the existing authority of the Federal Reserve banks to
purchase directly from the Treasury public debt obligations up to a
limit of $5 billion outstanding at any one time. In the absence of
action, this authority will expire at the end of this month.
This legislation is designed to assist the efficient management of
the public finances. On the basis of the record, I do not believe it
is controversial. The authority was first granted in its present form
in 1942 for a temporary period. It has been used prudently on a
limited number of occasions and has been renewed on fifteen separate
occasions since that time.
The value of the direct purchase authority does not rest on its
frequent or extensive use. Rather, it serves two related purposes.
Simply by being available as a backstop for all our Treasury cash
and debt management operations, it permits more economical management of our cash position over the years. I t also assures our ability
to provide needed funds almost instantaneously in the event of a
national emergency.
The reasons we feci that maintenance of this authority is essential
can be summarized under three points. First, it provides us with the
margin of safety that is necessary if we are to permit our cash balance
to fall to low levels during periods of seasonally lean revenues. This,
in turn, reduces the need for high balances during periods of flush
revenues and allows the public debt to be kept to a minimum, thus
saving interest costs to the Government.
Our current cash position illustrates the benefit of having this
backstop. In May, as a consequence of providing foreign governments
with investment opportunities for dollars flowing into their central
banks during the recent currency disturbances, our cash balance
was built up. I t was, therefore, possible to reduce the public borrowing
3
necessary to tide us over pending the receipt of June tax payments.
Some of this foreign money proved to be short-lived, however, and
our cash balance in recent days has been depleted abnormally. As a
result, and in anticipation of heavy receipts after June 15, we have
borrowed from the Federal Reserve banks for the past seven days.
This is the first time we have used the authority since September
1969.
In the second place, there is always the possibility that erratic
swings in money market conditions or international flows of funds
may produce changes of a character that rather suddenly reduce our
borrowings from other sources. In those circumstances, the availability of direct access to Federal Reserve credit would permit us
the flexibility required to draw on our cash and to arrange alternative
financing plans.
Finally, the direct purchase authority is available to provide an
immediate source of funds for temporary financing should this be
required by a national emergency. It is, unfortunately, possible to
visualize the kind of situation in which our financial markets would
be disrupted at a time when large amounts of cash had to be raised
to maintain governmental functions and meet the emergency. Consequently, the direct purchase authority is a key element in all our
financial planning for a national emergency or a nuclear attack. This
is a major reason why this authority is required for at least $5 billion,
even though, in the past, little more than a fifth of that amount has
ever been used.
Consistent with these three points, 1 want to emphasize that the
direct purchase authority is viewed by us as a temporary accommodation to be used only under unusual circumstances. The Treasury fully
agrees with the general principle that its new securities should meet
the test of the market. Moreover, this direct purchase authority
should not be considered a means by which the Treasury may independently attempt to influence credit conditions by circumventing
the authority of the Federal Reserve to engage in open market operations in Government securities. In that connection, it is important
to emphasize that any direct recourse by the Treasury to Federal
Reserve credit under this authority is subject to the discretion and
control of the Federal Reserve itself.
This borrowing authority has not been abused in the past. The
accompanying table, providing details on the instances of actual use,
show^s clearly that it has been used infrequently and for limited
periods. The borrowings are promptly shown on both the weekly
Federal Reserve and daily Treasury statements, assuring the widespread publicity that is the best possible deterrent to abuse. In addition, the Federal Reserve includes the information in its annual report
to the Congress. And, of course, this borrowing, is subject to the debt
limit.
As an insurance policy against financial emergency and an essential
backstop to our cash management, this authority must be kept available in case of need.
(The table referred to by Mr. Volcker follows:)
4
DIRECT BORROWING FROM FEDERAL RESERVE BANKS—1942 TO DATE
Calendar year
1942
1943
1944....
1945
1946
1947..
1948...
1949...
1950..
1951
1952
1953
1954....
1955
1956—
1957
1958...
1959„_
1960
1961
1962
1963
1964
1965
1966.
1967
1968
1969
1970...
19712
Days used
Maximum
amount at any
time
(millions)
Number of
separate
times used
Maximum
number of days
used at any
onetime
19
48
$422
1,320
4
4
6
28
9
484
2
7
2
2
4
30
29
15
220
180
320
811
424
1
2
2
4
2
2
2
1
2
9
20
13
2
207
1
2
3
7
8
21
169
153
596
1
3
3
2
3
3
6
12
(i)
(i)
(i)
(i)
1,172
(i)
(i)
(i)
(i)
(i)
(i)
(i)
(i)
(i)
(i)
._
1,102
(i)
i None.
2 Through June 14,1971.
Mr. VOLCKER. Thank you, Mr. Chairman. That completes my
statement.
The CHAIRMAN. Thank you, Mr. Volcker.
Heretofore, we have used this legislation as a springboard to get
the information that was more meaningful than is ordinarily presented
about the Government's credit. The Federal Reserve, under the
leadership of Dr. Burns is more responsive to our request than the
Board has been in the past. So far we have had no trouble in getting
the information we desire. Therefore it is not necessary for us to use
opportunities like this to go into this field more fully.
And so in that spirit of cooperation between this committee and
the Federal Reserve, with the cooperation our committee has had in
its effort to get information that we want when we want it, I don't
think I will ask any questions on this particular bill.
Off the record.
(Off the record.)
The CHAIRMAN. Mr. Williams.
Mr. WILLIAMS. Thank you, Mr. Chairman. I do not have any
questions. I think Mr. Volcker has made an excellent statement here
spelling out very clearly the purpose and the need for H.R. 7632.
I agree with you, Mr. Chairman, I think this is a bill that should be
reported out as soon as possible.
Thank you.
The CHAIRMAN. Mr. Barrett.
Mr. BARRETT. Mr. Chairman, I just want to ask a rather academic
question.
This temporary authority came into existence in 1942?
5
Mr. VOLCKER. That is correct.
Mr. BARRETT. YOU have used it 15 times, and approximately 250
days in total?
Mr. VOLCKER. Yes, sir. I t has been used in 15 years. I have not got
the addition here of how many days we have used it, but I think
your figures are roughly correct.
Mr. BARRETT. Does this legislation control the money in circulation?
Mr. VOLCKER. N O , I don't think this does at all control the money
in circulation, Mr. Barrett. The Federal Reserve can control the
money supply in the Nation through its operations. This in a sense
affects the reserve base, but they have the tools which they can use to
offset or supplement whatever effect this might have. So I don't
think it is fair to say that this authority in itself influences the money
in circulation. The totality of Federal Reserve operations do. This
could be a component at times. They have sufficient other authority
to offset or supplement, as I suggested.
Mr. BARRETT. I notice that yesterday, two U.S. banks raised their
prime interest rate from 5% to 5%. About 2 months ago, 1 should say,
the Fed was trying to hold the money supply down, that is, hold the
increase in the money supply to somewhere around 6 percent. I read
a few days ago that the money supply has increased by about 16 percent. Isn't this inflationary?
Mr. VOLCKER. The money supply figure that you are referring to,
Mr. Barrett, has fluctuated quite erratically in recent months. Last
month it was a rather high figure when you move it to an annual rate
basis, which is the basis you were quoting. I t is true there has been a
substantial increase in a couple of earlier months as well. Then there
was a period last year when the increase was rather small. So if you
average it together, say, in a 6-month period, then you come up with
a substantially smaller rate of increase than these figures that you
were quoting.
There is not a good and precise control over this figure from week to
week or month to month. You get a less alarming sounding figure if
you look at what has happened over a period of time and do not just
focus on the last few months. I t is true that the figures for the last
few months have been high.
Mr. BARRETT. Isn't it true that in order to get the interest rates
down the banks have cut down the prime interest rates several months
ago.
Mr. VOLCKER. The prime rate was reduced
Mr. BARRETT. Mortgage interest rates as well?
Mr. VOLCKER. Interest rates in general were reduced rather sharply
the latter part of last year, continuing into the first couple of months
of this year. In the past 3 months, roughly, market rates have turned
up again. Some of the decline has been retraced. There was an increase
in the prime rate sometime ago of one-quarter percent. One bank
yesterday did announce a further one-quarter percent increase.
Mr. BARRETT. Mr. Secretary, one final question I would like to ask
you. Was there not at one time an accord between the Department of
the Treasury and Federal Reserve regarding the purchase of debt
obligation?
Mr. VOLCKER. During World War I I and in the years immediately
thereafter, the Federal Reserve purchased Treasury obligations at a
more or less fixed rate. In 1951, the so-called accord was an agreement
63-356—71
2
6
that the Federal Reserve would cease buying Treasury obligations at
those so-called pegged rates. And thereafter the Treasury securities
have not been pegged in the market.
Mr. BARRETT. Let me close by asking you this, then. We are beingasked to amend section 14(b). That is the section of the Federal Reserve Act that you are asking to amend to give you this temporary
authority?
Mr. VOLCKER. To extend it.
Mr. BARRETT. T O extend it for 2 years.
Would not the accord, kept in existence, be the vehicle that you
could use for the same purpose that you are now asking to extend
authority for another 2 years for?
Mr. VOLCKER. I don't really think that they serve quite the same
purposes, Mr. Barrett. We had this authority, the Treasury had this
authority and the Federal Reserve had this authority, during the
period that they were pegging Government securities. This provides
authority to borrow directly from the Federal Reserve. I n the days
when they were supporting government bond prices and Government bond rates they still didn't buy directly from the Treasury. We
still sold in the market and they supported the market. Clearly when
they are doing that it assures us of a good and receptive market, and
in a sense it reduces perhaps the need for this kind of legislation. But
nonetheless we had to go through the market, and we couldn't do it on
the emergency type basis that is possible with this legislation.
Mr. BARRETT. I t is also done to stabilize the market.
Mr. VOLCKER. I t was done to stabilize the market during World
War II. That was the purpose of it.
The CHAIRMAN. Mr. Crane.
Mr. C R A N E . Thank you, Mr. Chairman.
Mr. Secretary, in this temporary power that was granted back in
1942, what were the fluctuations t h a t existed in the years anterior to
1942? I mean, we had a national emergency at that time, but in the
years anterior to that how, for example, did the Federal Reserve
Board or the Treasury Department deal with the problems t h a t you
have enumerated in your statement?
Mr. VOLCKER. I think the answer to that, Mr. Crane, must have been
the Treasury, in absence of this authority, would have had to be
perhaps more cautious and less economical in the management of
their cash balances than is possible when you have this authority. The
major operating benefit day in to day out, so to speak, from this
authority is that we can afford to operate somewhat closer to the vest
in terms of cash balances than would otherwise be prudent. Now, in
the early days of the Federal Reserve system they had such authority.
I t wasn't special authority, it was implicit in the general authority.
From roughly 1933 to 1942 such authority did not exist. T h a t was
generally a period when it was easy to finance in the markets, interest
rates were low, and no great emergency arose, and there were not any
severe problems that I am aware of that arose from lack of this
authority. But I think under the circumstances that the Treasury
could not operate as efficiently as when they have this authority. Of
course, the amounts involved then were a small fraction of the kind
of money t h a t runs through the Treasury these days.
Mr. CRANE. Mr. Secretary, in the years since 1945, which years
would you classify as national emergency years?
7
Mr. VOLCKER. I don't think we ever had, fortunately, to use this
authority in response to the kind of emergency to which I alluded in
my statement. We count our blessings in that respect. But you always
have to be prepared in case such an emergency arises. The use that
has been made of this authority is a much more technical kind of use.
I t has permitted us to carry lower cash balances than otherwise would
have been possible, and for technical reasons in smoothing the money
market it has been useful, upon rare occasions, to borrow temporarily
from the Federal Reserve. We certainly would not categorize that in
any way as an emergency.
Mr. CRANE. Mr. Secretary, one final question.
When the Federal Reserve System turns to borrowing of this nature
instead of borrowing from individuals in the risk of perhaps a slightly
higher interest rate does this not have an inflationary effect insofar
as there is a momentary and unusual expansion in the money supply?
Mr. VOLCKER. I don't think it would be fair to say that of the
kind of uses that we have made of this authority. I t has been in limited
amounts. The Reserve has been fully aware of the circumstances.
They have been taken into account in arranging their operations.
Therefore, it doesn't have the effect that you suggested. If we went
ahead and borrowed and made large use of this authority at unsuspected times when they were not able to take it fully into account in
their own operations, it might have that effect.
Now, in practice, I don't think it can have that effect, because in
the end they have the control. They must willingly lend the money.
I t is not our demand upon them that must be met. They must accede.
And so they have control of the nature, amount and timing of the
operation in the end, which provides protection against the danger
of the kind that you are rightfully cautious about.
Mr. CRANE. Thank you, Mr. Secretary.
I yield back the balance of my time.
The CHAIRMAN. Mrs. Sullivan.
Mrs. SULLIVAN. No questions. Thank you.
The CHAIRMAN. Mr. Frenzel.
Mr. FRENZEL. Thank you, Mr. Chairman.
Secretary Volcker, when you recently borrowed under the terms
of this authority what kind of rates did you pay?
Mr. VOLCKER. The present arrangement with the Federal Reserve
is that we pay one-quarter percent less than the discount rate, which
is currently 4% percent, so we would pay 4% percent.
Mr. FRENZEL. SO even though you have this friendly rate you don't
use it very much?
Mr. VOLCKER. We quite explicitly and consciously used it at infrequent intervals. We don't want any connotation of abuse of this kind
of authority. And we fully agree that it is appropriate for us in ordinary
circumstances to borrow in the market and \mj whatever rate the
market demands.
Mr. FRENZEL. Thank you, Mr. Chairman. I yield the balance of my
timeMr. CHAIRMAN. Mr. Reuss.
Mr. R E U S S . Thank you, Mr. Chairman.
Welcome again, Secretary Volcker.
I think the Treasury deserves this authority renewed. I am sorry
that your cash, balance has been depleted abnormally in recent days.
8
You will be delighted to know that this date, June 15, I have mailed
you a little check. If I had known you were coming I would have
given it to you personally. I think it will tide you over.
Mr. VOLCKER. We are looking forward to the receipt of that check
with some eagerness.
The CHAIRMAN. Mr. Brown.
Mr. BROWN. Thank you, Mr. Chairman.
Mr. Volcker, I notice that in your third point, you speak of a nuclear
attack. Really, is this a significant consideration?
Mr. VOLCKER. I don't know how you define significant.
As I indicated earlier we have never faced one of these emergencies,
and we have never had to use this kind of authority, fortunately, in
this kind of emergency. But if you ask me whether there are circumstances under which the financial market might be disrupted in the
midst of a national emergency, I can't sit here and tell you that there
is not that kind of possibility. And I think it is proper and appropriate
that we be provided with the means of handling it, however remote it
might be.
Mr. BROWN. I just think that your language is a little bit poignant
for the legislation.
Mr. VOLCKER. I must say that I noticed that in reading it myself.
But we still live in a world in which war and emergency are not
entirely absent.
Mr. BROWN. Mr. Secretary, you said that the Fed is not obligated
to accept a loan on your paper.
Mr. VOLCKER. That is right.
Mr. BROWN. But as a matter of fact, if you request it they always
do come through; isn't that right?
Mr. VOLCKER. Well, they always have
Mr. BROWN. May I rephrase my question. Has the Fed ever refused
to pick up your paper and permit you to borrow at the advantageous
rate that you can from Fed?
Mr. VOLCKER. Not to my knowledge. But we have always made
these requests when they fully understood the circumstances and
were in basic agreement with the logic of using the authority. If we
used it in the way that Mr. Crane posed, I would expect that they
would raise some questions about it.
Mr. BROWN. Mr. Secretary, in connection with the hearings on the
Export-Import Bank legislation, some of us explored the possibility
of having the Fed in effect pick up the paper temporarily, make a
loan, if you will, to the Export-Import Bank, but only at those times
when the Eximbank was put in a precarious position insofar as
carrying on its export of financing is concerned due to increased cost
of its money, similar to the crisis the Treasury is put in when you
utilize the provisions of this legislation.
The Federal Reserve at that time testified that this would be
very bad, because it would be putting hot dollars into the economy,
even though we attempted to say that if such a provision were
adopted, safeguards would be imposed. Is there a great deal of difference between the two?
Mr. VOLCKER. I think there is, Mr. Brown. I think the issue that is
raised with the Eximbank is whether the Federal Reserve should
directly provide credit for special purposes in the economy, however
worthy. And I happen to think that this is a worthy special purpose.
9
But there are a variety of worthy special purposes. I think that is
somewhat different than providing an emergency backstop for the
U.S. Government itself. The Eximbank can borrow from the Treasury,
and then, of course, it is a budgetary expense, appropriately. I t
seems to me it is better not to provide direct access to Federal Reserve
credit to a particular area of the economy aimed at a particular
problem, however important—and I think this is an extremely important one. If there is a general problem that in a sense affects the
whole Government, then the Treasury itself has that access.
Mr. Brown. Mr. Secretary, you are saying, then, that the access
to Fed in connection with a short-term need by Treasury is much
more important and significant, and almost a different animal, shall
I say, than the precarious position that we might find ourselves in
with respect to balance of payments and balance of trade?
Mr. VOLCKER. I yield to no one in my concern about the balance
of trade and the balance of payments. But I don't think that is a
a problem that requires a direct access by the Export-Import Bank
to the Federal Reserve.
Mr. BROWN. Let me stop you there and say, do you think that
the problem of the balance of trade and the problem of our balance
of payments is really somewhat unrelated to the financing of exports?
Mr. VOLCKER. N O . I want a good, adequate, aggressive export
financing effort. And I think that will be of assistance in our balance
of payments and balance of trade. I believe we can have that kind
of an export credit effort without providing direct access of the
Export-Import Bank to the Federal Reserve.
Mr. BROWN. Mr. Secretary, I think you have very adroitly picked
the duck without touching a feather.
Mr. ANNUNZIO. Mr. Chairman, may we have a rollcall?
The CHAIRMAN. We have a quorum.
Do you want a rollcall?
Call the roll, Mr. Clerk.
The CLERK. Mr. Patman?
The
CHAIRMAN.
Here.
The CLERK. Mr. Barrett?
Mr.
Here.
BARRETT.
The CLERK. Mrs. Sullivan?
Mrs.
SULLIVAN.
Here.
The CLERK. Mr. Reuss?
Mr.
REUSS.
Here.
The CLERK. Mr. Ashley?
Mr.
ASHLEY.
Here.
The CLERK. Mr. Moorhead?
(No response.)
The CLERK. Mr. Stephens?
(No response.)
The CLERK. Mr. St Germain?
Mr.
S T GERMAIN.
Here.
The CLERK. Mr. Gonzalez?
Mr.
GONZALEZ.
Here.
The CLERK. Mr. Minish?
(No response.)
The CLERK. Mr. Hanna?
Mr.
HANNA.
Here.
10
The CLERK. Mr. Gettys?
(No response.)
The CLERK. Mr. Annunzio?
Mr.
The
ANNUNZIO. Here.
CLERK. Mr. Rees?
Mr. R E E S . Here.
The CLERK. Mr. Bevill?
(No response.)
The CLERK. Mr. Griffin?
Mr.
Here.
GRIFFIN.
The CLERK. Mr. Hanley?
Mr.
Here.
HANLEY.
The CLERK. Mr. Brasco?
Mr.
Here.
BRASCO.
The CLERK. Chappell?
(No response.)
The CLERK. Mr. Koch?
Mr. KOCH. Here.
The CLERK. Mr, Cotter?
Mr.
Here.
COTTER.
The CLERK. Mr. Mitchell?
(No response.)
The CLERK. Mr. Widnall?
(No response.)
The CLERK. Mrs. Dwyer?
(No response.)
The CLERK. Mr. Johnson?
Mr.
Here.
JOHNSON.
The CLERK. Mr. Stanton?
(No response.)
The CLERK. Mr. Blackburn?
(No response.)
The CLERK. Mr. Brown?
Mr.
BROWN.
Here.
The CLERK. Mr. Williams?
Mr.
WILLIAMS.
Here.
The CLERK. Mr. Wylie?
(No response.)
The CLERK. Mrs. Heckler?
(No response.)
The CLERK. Mr. Crane?
Mr. C R A N E . Here.
The CLERK. Mr. Rousselot?
(No response.)
The CLERK. Mr. McKinney?
(No response.)
The CLERK. Mr. Lent?
(No response.)
The CLERK. Mr. Archer?
Mr.
ARCHER.
Here.
The CLERK. Mr. Frenzel?
Mr. FRENZEL. Here.
The CLERK. 21 Members present.
The CHAIRMAN. That is a quorum.
Mr. Ashley.
11
Mr. ASHLEY. Secretary Volcker, the last time you used this was
just a few weeks ago, I take it?
Mr. VOLCKER. We are using it right now, Mr. Ashley.
Mr. ASHLEY. And $610 million was taken out?
Mr. VOLCKER. We are in debt to the Federal Reserve under this
authority now.
Mr. ASHLEY. I see that over the years, since 1942, the most that was
ever borrowed at any time was $1,320 million, and it has only been
over a billion on five occasions in 30 years. So I am wondering why the
authority is as broad as it is. The average, of course, is around $300
million.
Mr. VOLCKER. T h a t is right. The actual use made of this authority
has been very limited. Part of its value, the major part of its value,
is having it there whether or not we use it. Because it does enable us
to operate more economically than would be possible if we didn't
have this authority and we got in a bind. We can run a little closer to
the margin of prudence, the margin of safety, knowing that if an
unsuspected problem comes along, as it has in the past week, we have
this authority. This past week I think is a good example. We got a lot
of extra money into the Treasury during May. And we knew that for
that reason we could limit our borrowing in the market, which would
have at that point just added to excess cash balances. We also know
that we could not be sure how long this foreign money would stay in
the Treasury. Some of it has now left us. We could have come back,
say, last week, on a kind of emergency basis and borrowed a lot more
money in the market. We only needed the money for a week, however,
because we are going to have tax payments from Mr. Reuss and others
beginning today. And it seemed reasonable under those circumstances
to use this authority.
Mr. ASHLEY. I quite agree. And I am for it, certainly, in principle
and in practice. I t does seem to me that the amount of authorization
is certainly sufficient unto the purpose. I t is very substantially more
than has ever been made any use of.
Has it always been $5 billion?
Mr. VOLCKER. I t has always been $5 billion. And I think the $5
billion amount is probably more related to these emergencies that
fortunately have not developed. We don't need that much for these
more or less technical operations.
The CHAIRMAN. I think a correction should be made. At first, there
was no limit at all, isn't that right?
Mr. VOLCKER. In the early days of the Federal Reserve, that is
right. There has been a limit of $5 billion ever since this type of authority has been available to us.
I would make one other point in that connection. The $5-billion
limit was put in during World War I I . We had thought the budget was
big then. I t is much bigger now. Our debt financing operations are
much bigger. So in a sense the $5 billion is relatively much smaller
than it used to be.
Mr. ASHLEY. A good point. Thank you very much, Mr. Volcker.
The CHAIRMAN. Mr. Archer.
Mr. ARCHER. I yield my time, Mr. Chairman.
The CHAIRMAN. Mr. St Germain.
Mr. S T GERMAIN. Mr. Volcker, the last time we met was in another
committee, we disagreed completely. Today I agree with you on this
and I have no questions.
12
Mr. VOLCKER. Thank }^ou, sir.
The CHAIRMAN. Mr. Johnson?
Mr. JOHNSON. I just want to welcome the esteemed gentleman
here this morning. I have no questions.
Mr. VOLCKER. Thank you, Mr. Johnson.
The CHAIRMAN. Mr. Gonzalez.
Mr. GONZALEZ. I don't have any questions on this bill, Mr. Chairman.
The CHAIRMAN. Mr. Hanna.
Mr. HANNA. I just have one question, Mr. Secretary, on this bill.
There are three classic cases under which the authority will be utilized.
And you have also made it equally clear that the third category has
not up to this time ever occurred.
Mr. VOLCKER. That is correct.
Mr. HANNA. On the other two, as I understand them, one comes
when the tax intake is somewhat slow as compared to the need for
cash in the Treasury, and the other is when you have some influence
from the international flows.
Mr. VOLCKER. I t might be domestic, too.
Let me take a kind of a case that I don't think has arisen, b u t could
arise. Suppose we are in the midst of a large financing operation, which
was planned and will be adequate to take care of our needs. And some
disturbance arises in the money markets, so that we don't raise all
the money that we anticipate in that financing operation, and as a
result, our balance is depleted. We could then go to the Federal Reserve
and use this authority. T h a t is the kind of circumstance that we have
in mind. And while we have never actually been faced with that
circumstance to a degree that forces us to use this authority, we have
been faced with very uncomfortable market circumstances when we
were glad that we had this authority, and we might have had to use it.
Mr. H A N N A . What I want to find out from you is, in view of the
rather increased problems in the international money circumstances,
do you think that there is any more likelihood of this coming into the
picture than was true in the past?
Mr. VOLCKER. Yes, I do, Mr. Hanna. And I think this current use
is rather fully related to the rather massive international flows of funds
recently. And if we are going to have those kinds of massive flows,
which in some instances affect our cash position, this authority becomes all the more important.
Mr. H A N N A . I think it is worth emphasizing the fact that because
of the period we are moving into, and we are now in
Mr. VOLCKER. I think you are exactly correct in emphasizing that.
Mr. HANNA. The other question I had, has nothing really to do with
this bill. B u t I wronder, has the Treasury testified yet on that Senate
bill that has a provision for Federal control by the use of differential
reserves for uses of credit?
Mr. VOLCKER. I don't believe we testified or requested to testify on
that bill, Mr. Hanna, to the best of my memory.
Mr. H A N N A . I have no further questions.
The CHAIRMAN. Mr. Annunzio.
Mr. ANNUNZIO. Mr. Chairman, the Secretary has made a fine statement and all the questions have been answered, as far as I am concerned. We have a quorum and we are losing that quorum fast, and
therefore I would like to suggest that we have a rollcall on this bill.
13
The CHAIRMAN.
until each member
Mr. ANNUNZIO.
The CHAIRMAN.
I don't think it would be in order, Mr. Annunzio,
has had an opportunity to question.
I relinquish the balance of my time.
Mr. Rees.
Mr. R E E S . N O questions.
The CHAIRMAN. Mr. Bevill.
Mr. B E V I L L . N O questions, Mr. Chairman.
The CHAIRMAN. Mr. Griffin.
Mr. G R I F F I N . N O questions.
The CHAIRMAN. Mr. Hanley.
Mr. HANLEY. N O questions.
The CHAIRMAN. Mr. Brasco.
Mr. BRASCC. N O questions, Mr. Chairman.
The CHAIRMAN. Mr. Koch.
Mr. KOCH. N O questions, Mr. Chairman.
The CHAIRMAN. Mr. Cotter.
Mr. COTTER. N O questions, Mr. Chairman.
The CHAIRMAN. All right. I want to make one observation on
what the Undersecretary said about this accord in 1951.
Who was in that accord, who was a party to that accord?
Mr. VOLCKER. Essentially, the Treasury and the Federal Reserve.
The CHAIRMAN. HOW about the President?
Mr. VOLCKER. The President was certainly involved, too.
The CHAIRMAN. But he didn't sign that accord, didn't agree to it.
How do you have an accord without the President of the United
States in a matter of this nature? He called the Federal Reserve
Board in, and some of the reporters who wrote stories said the President called them names. He said, "you can't raise interest rates, if
you do, why, you will be doing a great disservice to this country."
And he just told them they couldn't do it, he wasn't agreeing to any
accord to raise rates. Now, the treasury did raise the rate from 2% to
2%. But it was in nonnegotiable bonds only, and it didn't mean as
much as a 2}£-percent effective rate, for the reason that if you had the
23£-percent nonnegotiable, you had to trade them for short-term purpose and take a loss, then you would sell the short-term paper at a
loss. So effectively it did not raise the rates at all.
And may I invite your attention to the fact that that was in early
1951. And although it was a major issue during 1951 and 1952 while
Mr. Truman was in power, they never raised those rates above 2}{
percent. All during that time, when the long-term Government
interest rate was 2% percent and less, and even after Mr. Eisenhower
came in, on January 10, 1953, the rate they asked for money, the
President did under Mr. Humphrey, he wanted high rates, they were
able to get that money for 2% percent in their first issue, and on the
next issue 2% percent. And then Mr. Humphrey, the Secretary of
the Treasury, arbitrarily asked for bids on a billion dollars—and he
had more than that in the Treasury, and they didn't ever need it,
but solely for the purpose of effectuating an increase in interest
rates. It almost caused a depression. And then when they commenced raising rates, they were pla}Ting for keeps, and they kept
going up until recently.
So this accord, I think, has been overplayed.
You don't have a copy of that accord, do you, Mr. Volcker?
Mr. VOLCKER. I don't have one with me, no, sir.
14
The CHAIRMAN. YOU don't have one any place, do you?
Mr. VOLCKER. I am sure we have one.
The CHAIRMAN. I was here at the time, b u t I have never seen
one.
Mr. VOLCKER. M y recollection is that there was a statement issued
by the Treasury and the Federal Reserve.
The CHAIRMAN. I t was an accord just between themselves, wasn't
it?
Mr. VOLCKER. I will not challenge your recollection as to the
events of 1951, in that respect, Mr. Chairman, You were here then
and I was not.
The CHAIRMAN. I felt like I was a little close to it.
Mr. WILLIAMS. Mr. Chairman.
The CHAIRMAN. Mr. Williams.
Mr. WILLIAMS. I would like to suggest to you that the conditions
have changed dramatically since 1951, both as far as our national
debt is concerned and as far as our unfavorable balance of payments
are concerned. I would like to move the previous question.
The CHAIRMAN. I am ready to agree to that, because we want to
get through while we have a quorum, but, first, I want to make one
little announcement. This is the birthday, June 15, 1971, of the
biggest payment that was ever made in history by the American Government, the biggest single transaction. On this date in 1936, every
veteran of World War I received a letter from Uncle Sam and the
post office, either by general delivery or post office box or by city
carrier or rural carrier, every one of the 3% million veterans received
a letter. Each letter said you are entitled to so much money in payment
of your adjusted service certificates. Some people called it a bonus.
I t wasn't a bonus, it was just pay. And it said, if you will take this
letter to the nearest bank you can get your money in cash right now,
or you can leave it and deposit it and you will get interest on it. And
t h a t involved $1,015 each for 3% million veterans, or nearly $3 billion.
Mr. VOLCKER. I didn't realize that, Mr. Chairman. But we celebrated that anniversary by paying the 10 percent retroactive increase
in social security benefits beginning today.
The CHAIRMAN. Have they got it?
Mr. VOLCKER. They will very shortly.
The CHAIRMAN. Well, make it June 15, so it will coincide.
Any other discussion?
Mr. BROWN. Mr. Chairman?
The CHAIRMAN. Mr. Brown.
Mr. BROWN. I would just like to inquire of the Chair, if I may,
since he has such a continuing and long-standing knowledge of money
and finance, and since I have heard him say on many occasions that
the real cause of our inflation is the increasing cost of money, interest
rates, I would just like to ask him, because I can't understand it, why
interest rates have gone down as much as 30 percent or more and still
inflation is increasing.
The CHAIRMAN. I t is understandable, because the prime interest
is the one that has been going down
Mr. BROWN. Mr. Chairman, home mortgages in my district are
just the same. And it seems to me that we would have a reduction in
inflation.
15
The CHAIRMAN. YOU would have a reduction in inflation if you had
stabilized interest rates. But as long as you let the banks just arbitrarily
Mr. BROWN. I suggest that there has been a greater stabilization in
interest rates over the past several months than there has been in
any other thing.
The CHAIRMAN. Yesterday, they raised the rates at a time when
they had more money than they ever had in history.
Mr. BROWN. There are bound to be fluctuations in things. Interest
rates at least fluctuate, but other things never go down in price.
The CHAIRMAN. If they believed that, then they should have
raised the rates.
Mr. Volcker, we appreciate your appearance. If there are no other
questions that the members desire to ask you, we will excuse you,
sir, with the thanks of the committee.
Mr. VOLCKER. Thank you very much.
The CHAIRMAN. Mr. Barrett.
Mr. BARRETT. I move the committee adopt the bill S. 1700, and
that the committee report the bill favorably, and let the chairman
take all the necessary action to get further consideration for the legislation, and that the staff be given the authority to make any technical
changes in the legislation.
The CHAIRMAN. Would you be willing to ask that the rule requiring the filing, and so forth, be waived, so as to get the bill expedited,
if necessary?
Mr. BARRETT. I so insert that in my motion.
The CHAIRMAN. If we get two-thirds vote it would be all right.
All right, are you ready for the question?
As many as favor, let it be known by saying, "aye."
(Chorus of "ayes.")
All opposed, say " n o . "
(None.)
Rollcall.
The CLERK. Mr. Patman?
The CHAIRMAN. Aye.
The CLERK. Mr. Barrett?
Mr. BARRETT. Aye.
The CLERK. Mrs. Sullivan?
Mrs. SULLIVAN. Aye.
The CLERK. Mr. Reuss?
(No response.)
The CLERK. Mr. Ashley?
Mr. ASHLEY. Aye.
The CLERK. Mr. Moorhead?
(No response.)
The CLERK. Mr. Stephens?
(No response.)
The CLERK. Mr. St Germain?
Mr. S T GERMAIN. Aye.
The CLERK. Mr. Gonzalez?
Mr. GONZALEZ. Aye.
The CLERK. Mr. Minish?
(No response.)
The CLERK. Mr. Hanna?
Mr. HANNA. Aye.
The CLERK. Mr. Gettys?
(No response.)
The CLERK. Mr. Annunzio?
Mr. ANNUNZIO. Aye.
The CLERK. Mr. Rees?
Mr. R E E S . Aye.
The CLERK. Mr. Bevill?
Mr. B E V I L L . Aye.
The CLERK. Mr. Griffin?
Mr. G R I F F I N . Ave.
The CLERK. M r ' Hanley?
Mr. H A N L E Y . Aye.
The CLERK. Mr. Brasco?
Mr. BRASCO. Aye.
The CLERK. Mr. Chappell?
(No response.)
The C L E R K . Mr. Koch?
Mr. K O C H . Aye.
The CLERK. Mr. Cotter?
Mr. COTTER. Aye.
The CLERK. Mr. Mitchell?
(No response.)
The CLERK. Mr. Widnall?
Mr. WIDNALL. Aye.
The CLERK. Mrs. Dwyer?
(No response.)
The CLERK. Mr. Johnson?
Mr. JOHNSON. Aye.
The C L E R K . Mr.'Stanton?
(No response.)
The C L E R K . Mr. Blackburn?
Mr. BLACKBURN. Aye.
The CLERK. Mr. Brown?
Mr. BROWN. Aye.
The CLERK. Mr. Williams?
Mr. WILLIAMS. Ave.
The CLERK. Mr. Wylie?
(No response.)
The CLERK. Mrs. Heckler?
(No response.)
The CLERK. Mr. Crane?
Mr. C R A N E . N O .
The C L E R K . Mr. Rousselot?
(No response.)
The CLERK. Mr. McKinney?
(No response.)
The C L E R K . Mr. L E N T ?
(No response.)
The CLERK. Mr. Archer?
Mr. ARCHER. N O .
The CLERK. Mr. Frenzel?
Mr. F R E N Z E L . Aye.
The CLERK. 22 "ayes", one "11
17
The CHAIRMAN. The motion prevails, and every effort will be made
to expedite the passage of the bill.
Is there anything else before the committee at this time?
If not, without objection, the committee will stand in recess subject
to the call of the Chair.
(Whereupon, at 10:50 a.m., the committee adjourned subject to the
call of the Chair.)
@FedFRASER