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.
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Federal Reserve Bank of St. Louis
Collection: Paul A. Volcker Papers
*Call Number: MC279
Box 11
Preferred Citation: Congressional Correspondence, March-April 1982 [Folder 2]; Paul A. Volcker
Papers, Box 11; Public Policy Papers, Department of Rare Books and Special Collections, Princeton
University Library
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Federal Reserve Bank of St. Louis
Business/Professional Day
in Washington
MARCH 31, 1982
Hosted by
Congressman Jim Dunn
Sixth Michigan District
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
L.
Congressman Michael G. Oxley
Fourth Ohio District
]
10:00 A.M.
Honorable Robert Dole, Chairman
Senate Finance Committee
10:45 A.M.
Honorable Paul Volcker, Chairman
Federal Reserve Board
11:30 A.M.
Honorable Drew Lewis, Secretary
Department of Transportation
12:15 P.M.
Lunch in Rooms 338, 339 & 340
Rayburn House Office Building
SPEAKERS DURING LUNCHEON
12:30 P.M.
Honorable Ted Stevens, Majority Whip
United States Senate
12:50 P.M.
Honorable Trent Lott, Minority Whip
U.S. House of Representatives
1:15 P.M.
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Federal Reserve Bank of St. Louis
Honorable B. Oglesby, Deputy Assistant
White House Congressional Liaison
1:35 P.M.
Honorable Robert Michel, Minority Leader
U.S. House of Representatives
1:50 P.M.
Photo Session - Steps of the Capitol
RETURN TO 345 CANNON H.O.B.
2:00 P.M.
Honorable Donald Regan, Secretary
United States Treasury
2:45 P.M.
Honorable David Stockman, Director
Office of Management and Budget
3:30 P.M.
Honorable Murray Weidenbaum, Chairman
President's Council of Economic Advisors
4:15 P.M.
Honorable Elizabeth Dole
Office of Public Liaison
5:15 P.M.
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Federal Reserve Bank of St. Louis
Reception at the Capitol Hill Club
10:00 A.M.
Honorable Robert Dole, Chairman
1:35 P.M.
U.S. House of Representatives
Senate Finance Committee
10:45 A.M.
Honorable Paul Volcker, Chairman
Honorable Robert Michel, Minority Leader
1:50 P.M.
Photo Session - Steps of the Capitol
Federal Reserve Board
RETURN TO 345 CANNON H.O.B.
11:30 A.M.
Honorable Drew Lewis, Secretary
Department of Transportation
2:00 P.M.
Honorable Donald Regan, Secretary
United States Treasury
12:15 P.M.
Lunch in Rooms 338, 339 & 340
Rayburn House Office Building
2:45 P.M.
Honorable David Stockman, Director
Office of Management and Budget
SPEAKERS DURING LUNCHEON
3:30 P.M.
12:30 P.M.
Honorable Murray Weidenbaum, Chairman
President's Council of Economic Advisors
Honorable Ted Stevens, Majority Whip
United States Senate
4:15 P.M.
12:50 P.M.
Honorable Elizabeth Dole
Office of Public Liaison
Honorable Trent Lott, Minority Whip
U.S. House of Representatives
5:15 P.M.
1:15 P.M.
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Federal Reserve Bank of St. Louis
Honorable B. Oglesby, Deputy Assistant
White House Congressional Liaison
Reception at the Capitol Hill Club
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Federal Reserve Bank of St. Louis
1932 FF1.3 2:3
t
!7
February 22, 1982
The Honorable Paul A. Volcker, Chairman
Board of Governors
Federal Reserve Board
Washington, D.C. 20551
Dear Mr. Volcker:
Thank you for accepting our invitation to speak at Businessma
n's
Day in Washington on March 31st at 10:45 to 11:30 a.m. in
room 345 of
the Cannon House Office Building.
We are looking forward to your commments on monetary and
fiscal
policies facing our nation today. Your participation in Busin
essman's
Day will surely contribute to a most informative and enlightening
program for our businessmen.
Again, thank you for accepting our invitation, and we look forwa
d
to seeing you.
Sincerely,
Six
unn
of Congress
ichigan District
chael G. Oxley
ember of Congress
Fourth Ohio District
Congrems of the tiniteb &tato
jboufse of RepresSentatibui
19,f12 FFR
fitlatington,ID.C. 20515
February 1, 1982
Honorable Paul A. Volker
Chairman
Board of Governors
Federal Reserve Board
Washington, D.C. 20551
Dear Mr. Volker:
Many businesses in our districts are experiencing a most difficult and
challenging year due to te fluctuation of interest rates and high unemployment.
They are keenly aware of the role of the Federal Reserve and how it will directly
effect their businesses through changes in the marketplace.
We are extremely sensitive to the concerns and needs of our constituents.
Unemployment in the sixth district of Michigan and the fourth district of Ohio is
running 9.8 and 15.8 percent respectively, an average of 4.5 points above the
national average. Many small businesses and industries are barely surviving or
are on the verge of bankruptcy.
Reinforcing the idea that the economy can and will be turned around in
the months ahead, we are co-hosting a Business Day in Washington on March 31,
1982. It would be an honor and privilege for both of us if you would speak at
our seminar.
Approximately 200 businessmen and women from both our districts will be
flying to Washington to attend this seminar. We would like you to address our
group on Wednesday.2. March 31st at 10:45-11:30 in room 345 Cannon House
Office Building. T1 thig time-i-s. not convenient or if you should have any
questions regarding this request, please do not hesitate to contact either of us
or Victoria Looney, the staff member who is coordinating this event at 225-4872.
Sincerely,
Ji Dunn
Me er of Congress
Six h Michigan District
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Federal Reserve Bank of St. Louis
11' A
LAN&.
.
iOae-11% 01
Methber of Con ess
Fourth Ohio D trict
HOUSE OF REPRESENTATIVES
SENATE
HENF/Y S. REUSS, WIS., CHAIRMAN
RICHARD BOLLING, MO.
LEE H. HAMILTON, IND.
GILLIS W. LONG, LA.
PARREN J. MITCHELL. MD.
FREDERICK W. RICHMOND, N.Y.
CLARENCE J. BROWN. OHIO
MARGARET M. HECKLER, MASS.
JOHN H. ROUSSELOT, CALIF.
CHALMERS P. WYLIE, OHIO
ROGER W. JEPSEN, IOWA.
VICE CHAIRMAN
WILLIAM V. ROTH, JR., DEL.
JAMES ABDNOR, S. DAK.
STEVEN D. SYMMS, IDAHO
PAULA HAWKINS, FLA.
MACK MATTINGLY, GA.
LLOYD BENTSEN, TEX.
WILLIAM PROXMIRE. WIS.
EDWARD M. KENNEDY, MASS.
PAUL S. SARBANES, MD.
Congre55 of the Einiteb
tate5
JOINT ECONOMIC COMMITTEE
(CREATED PURSUANT TO SEC. 5(a) OF PUBLIC LAW 304, 79TH CONGRESS)
JAMES K. GALBRAITH,
EXECUTIVE DIRECTOR
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Federal Reserve Bank of St. Louis
2
:7
WASHINGTON, D.C. 20510
March 3, 1982
The Honorable Paul A. Volcker
Chairman
Board of Governors
The Federal Reserve System
Washington, D.C. 20551
Dear Mr. Volcker:
We are delighted that you will have breakfast with
the Republican members of the Joint Economic Committee.
The breakfast meeting will be on Wednesday, March 31,
1982, at 8:15 a.m. in S-113 in the U.S. Capitol. The
best entrance is the drive through tunnel under the Senate
wing east steps.
Five or six members of the Committee and eight to
ten JEC staff members will be in attendance. We would
like you to make informal remarks for about ten minutes
and then engage in a dialogue with the members and staff.
The proceedings are off the record. We will conclude by
9:45 a.m.
As the time approaches, I will advise your secretary,
Mrs. Malardi, which members are expected to be in attendance.
Sincerely,
Charles H. Bradford
Assistant Director
CHB:cbs
Ir
e/ Att,,,,,
.
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,
.doe
March 3, 1982
The Honorable L. h. Fountain
House of Representatives
Washington, D.C. 20515
Dear Mr. Fountain:
I am pleased to respond to your request for comment
or
on a letter that you received from Mr. Robrrt B. Frantz, Seni
Vice President of the First Union National Bank in Wilson,
North Carolina. Mr. Frantz expressed concern over what he
ry
regards as an undi*y slow deregulatory pace by the Deposito
Institutions Deregulation Committee (DIDC).
I want to assure you that I understand the concerns
that prompted Mr. Frantz to write to you. As you know, the
Committee has been charged by Congress with an inherently
difficultttask--to phase out deposit interest rate ceilings
in order to increase the return to aavers while at the same
tion
time taking into consideration the current difficult situa
thrift
of depository institutions, including, prominently, many Deceminstitutions. At the Committee's most recent meeting on
further
ber 16, a decision was made to postpone consideration of
ng
deregulatory actions until the Convittee's next scheduled meeti
of
on March 22. I joined in that decision in part because some
d many
the deregulatory proposals on the agenda might have place very
a
thrift institutions under further earnings pressures at
inopportune time.
The Committee will reconsider varchous deregulatory
inapproproposals at its meeting later this month. It would be
at
priate for me to comment on what decisions might be reached
the
that meeting. I would only note that as time goes on the
Committee's deregulatory mandate from the Congress and ns vislikely competitive position of all depository institutio
a-vis money market funds and other market instruments will
ons.
require continued consideration of further deregulatory acti
Let me assure you that, in consultation with DIDC
e, I will
Chairman Regan and the other members of the Committe
for deregulagive serious consideration to the various proposals
tory action at our next meeting.
Sincerely,
NB:slb (V-42)
bcc: Normand Bennard
Mrs. Mallardi (2)/
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Federal Reserve Bank of St. Louis
Action assigned Mr. Bernard
L 4. FOUNTAIN
WASHINGTON OFFICE:
°DISTRICT
WALTER J. PITTMAN
ADMINISTRATIVE ASSISTANT
)1
i CAROLINA
0:TPH
'Armoric
COM MITTEE ON
GOVERNMENT OPERATIONS
TED L. DANIEL
EXECUTIVE ASSISTANT
- tate5
Congrecz of tbe Eniteb :1;)
2188 RAYBURN HOUSE OFFICE BUILDING
SUBCOMMITTEE:
CHAIRMAN, INTERGOVERNMENTAL
R ELATIONS AND HuMAN RESOURCES
PousSe of Reprei4entatibeZ
WASHINGTON. D.C. 20515
TELtpi-toNE: (202) 225-4531
Eassbington, 73.C. 20515
COMMITTEE ON
FOREIGN AFFAIRS
February 24, 1982
DISTRICT OFFICE:
EDGECOMBE COUNTY Orricr BUILDING
TARBORO, NORTH CAROLINA
SUBCOMM ITTEES:
INTERNATIONAL SECURITY AND
SCIENTIFIC AFFAIRS
EUIN>rt AND THE MIDDLE EAST
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Federal Reserve Bank of St. Louis
Mr. Paul A. Volcker
Chairman
Depository Institutions Deregulation
Committee
20th and Constitution Avenue
Washington, D. C. 20551
Dear Mr. Chairman:
Enclosed is a self-explanatory letter I have received from my constituent, Mr. Robert B. Frantz of
Wilson, N. C.
I will appreciate your furnishing me information
upon which to base a reply.
With thanks and kindest regards, I am
Sincerely,
.„.""/z
L. H. Fountain
LHF:gw
Enc.
27888
TILX:PHONC: (919) 823-4200
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Federal Reserve Bank of St. Louis
fib
198?
Robert B Frantz
Senior Vice President
February 9, 1982
Congressman L.H. Fountain
2188 Rayburn Building
Washington, D.C. 20515
Dear L.H.,
Re:
Deregulation
The Depository Institutions Deregulation Comm
ittee has been
stalling for some time now in the proposal to
permit banks
and bank customers to enjoy parity with other
depository
institutions and money market funds. One prop
osal which has
been delayed would have been the setting of a
definite
schedule for removal of Federal ceilings on
interest rates
which would be paid to depositors. The other
area of deregulation was to authorize an interest bearing tran
saction account
to permit banks and savings and loans the oppo
rtunity to offer
customers an account that would be competitive
with money
market mutual funds. Their inaction continue
s to cause rather
substantial disintermediation by taking deposits
from deposit
taking entities and placing these dollars in vari
ous money
market funds.
Some predicted that allowing IRA rates to be unca
pped would have
dramatic negative effects on the savings and loan
industry competing for these deposits; this has not happened
. Some also
predicted that the tax-free savings certificates
would be
enormously beneficial to the balance sheet; they were
wrong in
this case also.
I urge you to please look into the stalling tactics
and delay in
the Depository Institutions Deregulation Committee
to see if
there is not something that can be done to expedite dere
gulation
so that the depository institutions in this country
can be more
on a parity in attracting funds with various money mark
et funds
and other dollar gathering entities.
Thanks very much for your assistance in this matter.
alb
Very truly yours,
First Union National Bank, Post Office Box 860,
Wilson, North Carolina, Telephone (919)
291-7300
•
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20E51
March 1, 1982
PAUL A. VOLCKER
CHAIRMAN
The Honorable William E. Dannemeyer
House of Representatives
Washington, D.C.
20515
Dear Mr. Dannemeyer:
Thank you for your recent letter on the relationship
between federal budget deficits and interest rates. You
expressed the view that a reduction in federal spending
sufficient
to balance the budget would, through reduced borrowing
requirements, bring down interest rates. In addition, you reque
sted
any quantitative information that the Federal Reserve
might
have on the impact of a balanced budget on interest rates
, and
particularly the cost of servicing the debt.
In the current environment of anti-inflationary monetary policy, a significant reduction of budget deficits
over
the coming years would make a necessary contribution to the
prospects for a sustained economic recovery. Although sizab
le
deficits can be accommodated in the current recession perio
d,
large, sustained deficits during recovery must be avoided.
Restraining federal deficits will reduce federal government
demands on the private supply of savings, and, as a result,
upward interest rate pressures can be mitigated and the availability of funds for expansion of businesses and the housing
industry increased.
The precise quantification of the relationship between
budget deficits and interest rates is difficult and perhaps
impossible since interest rate movements are the result of many
factors affecting the supply and demand for credit. Part of
the difficulty in assessing interest rate impacts arises from
the fact that there is little past experience with changes in
federal spending and deficits of the magnitude that would occur
if no action is taken. But, more importantly, much of the
pressure on interest rates is related to a lack of confidence
in the government's carrying through on disciplined financial
policies and thereby on its anti-inflation program. A retur
n
of confidence could result in a considerable relaxation of
interest rate pressures. Despite the difficulty of estimating
the impact precisely, the direction of the effect is clear
and
critically important to obtain.
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Federal Reserve Bank of St. Louis
s.
The henorable William E. Dannecyor
Page Two
As you also point out, lower interest rates do have
favorable effects on the cost of servicing the public debt.
of the national debt does not mature within a year,
Since
a lowering of interest rates would only reduce interest expense
on new debt sold to fund current deficits and maturing debt.
At this time, approximately one-half of the roughly $700 billion
of outstanding 1- rivately-held public debt matures within one
year. Therefore, the savings on interest in the first year due
to an im:Ilediate one percentage point ref.uction in interest rates
would be roughly $2-3 billion according to models developed at
tne Office of Management and Budget anc the Congressional Dudget
Office. The effect cumulates over time, however, as more of
the maturing aebt is refinanced at the lower rate of interest
and becees an appreciable factor in the budget within two or
three years.
I hope that you find these comments on the relationship between butget deficits and interest rates helpful, and
I appreciate your concern on this important issue.
Sincerely,
DC:SL:JLK:NS:pjt (#V-30)
bcc: Mr. Cohen
Ms. Lepper
Ms. Wing
Mrs. Mallardi (2t7.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
Action assigned Mr. Kichline
REPLY, IF ANY TO:
WILLIAM E. DANNEMEYER
39TH DISTRICT, CALIFORNIA
WASHINGTON OFFICE:
0 1032 LONGWORTH HOUSE OFFICE BLDG.
WASHINGTON, D.C.
COM M ITT E ES
ENERGY AND COMMERCE
20515
(202) 225-4111
POST OFFICE AND CIVIL
DISTRICT
SERVICE
OFFICE:
1370 BREA BOULEVARD
SUITE 108
Congret45
tbe tiniteb
tate5
FULLERTON, CALIFORNIA
92635
(714) 992-0141
jbotust of ilepreiSentatiba
leastingtott,;D.C. 20515
February 8, 1982
The Honorable Paul A. Volcker
Chairman, Board of Governors
Federal Reserve System
20th and Constitution Avenues, N.W.
Washington, D.C. 20551
Dear Mr. Volcker:
I want to commend you for your statement before the Joint Economic Committee
in which you spoke about the impact of deficit spending on federal borrowing, which
in turn affects interest ratcs and the economy. I am pleased that you urged the
Congress to bring the federal budget more into balance.
It is my opinion that a reduction in federal spending sufficient to balance
the budget would bring down interest rates. In addition, I am aware that one of
the largest items in the unified budget is the payment of interest on the public
debt. Further, it is often argued that a large part of the increase in the deficit
stems from unanticipated increases in interest rates, which lead to unplanned
interest payments.
With the above thoughts in mind, it seems to me that a reduction in federal
spending, and eventually a balanced budget, would allow interest rates to decline,
which in turn would reduce the cost of servicing the public debt. I would like to
inquire as to whether the Federal Reserve has any information that might quantify
the impact of a balanced budget on interest rates, and particularly the cost of
servicing the debt. It would also be helpful if you have any data on how increases
or decreases in federal borrowing generally might impact upon interest rates.
If your office has any questions about this request, please have them call
John Shelk of my staff. I look forward to hearing from you.
Si cerely
WED/js
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Federal Reserve Bank of St. Louis
Dannemey
Member of Congress
1
+rasp'
iitinited States
of America
Va. 128
-alaw qoP •
qs
PROCEEDINGS AND DEBATES OF THE n
y/
iLL V**-46-V
th
CONGRESS, SECOND SESSION
WASHINGTON, MONDAY,JANUARY 25, 1982
NG. I
Mr. DANNEMEYER. Mr. Speaker,
EAECE WILL, THE: DEeICIT BE?
agencits, anti the Federal Governbudgetary considerations dominated
In
Decembe
r
of
last
year,
the econo- ment. Spokesmen for this point of
the 1st session of the 97th Congress.
mists
at
the
Oifice
of
Management view inform us that credit demands
As we return for the start of the
and
Budget
COM13)
reported
ly in- aro low from the private sector, parsecond session, it strongly appears
formed
the
White
House
that
they
ex- ticularly in a recession. This may
that fiscal policy' will again occupy
center stage. The Federal budget, this pected a fiscal year 19n2 deficit of $109 mean that the 1982. deficit will have
time for fiscal year 1983 and beyond, billion unless corrective steps were less of' a upward impact on interest
taken. The OMB analysis included fig- rates than would otherwise be true,
will be the top item on out agenda.
When we came back to the Nation's ures of $152 billion for fiscal year 198'3 but such a condition does not help us
very much in planning for 1983 or in
Capital at the end of the August and $162 billion in fiscal year 198-1.
Other sources independently arrived understanding why deficits are imporrecess, high interest rates were the
primary consideration on our mincLs. at similar conclusions. Just before tant. Just because credit may be availUnfortunately, we failed to take reme- Chriatmas. President Rt'al-Tan Met With able in 1982 does not contradict the
dial action. We left Washington for Senate Republican cormnittee chair- maxim that deficit spending. when not
our home districts after simply reaf- men. They presented him with the monetized in whole or in part. will put
firming, in a pro forma fashion, the forecasts of the Senate Budget Com- upward pressure on interest rates. The
outdated first concurrent resolution mittee. These numbers indicated that upward pressure on interest rates
on the budget for fiscal year 1982. an $82 billion dinThit could occhr in from Federal borrowing may be offact,
While I was in California these past fiscal year 1982, inereasing to $165 bil- in whole or in part, by downward presseveral weeks, I have seen the impact lion in fiscal year 198a and a stagger- sure on interest rates from a slack in
private demand. This is probably true
of our failure to act. The national un- ing Van billion in fiscal year 1984.
'The Congressional Budget- Office today. I doubt, however, that it is in
employment rate has climbed to 8.9
and private economists, while differing the economy's long-term interes'
percent amidst forecasts that it will
to
on the exact numbers, produced pro- devise a budget policy based on an asclimb over the 9-percent mark in the
near future. In Anaheim. Calif., the jections within the range of the above sumption of low private demand due
local Delco Remy automotive battery numbers. While the President will not to a recession. Our goal should be ecomanufacturing plant laid off 40 per- formally submit his budget message to nomic growth, not private sector stain
cent of its current wora force on Congress until February 8, 1982, we nation.
are told through the news media that The third myth is closely
Monday, January 11, 1982. Juat
linked to
the
deficit for fiscal year 1983 will be the second one. This concept
weeks ago, the plant employed 550
is that
people. After the layoffs, the plant around $75 billion. Presidential advis- the deficit is really not as large as it
viairli force is down to 225. The prob- ers appear to be excited that they appears because most of it is caused by
lems of the auto industry are varied have managed to hold the deficit the recession. In a recession, goes the
below $100 billion.
conventional description. Federal revand complex, but high interest rates
DO DEFICITS MATTER OR NOT?
have certainly aggravated the situaenues decline with unemployment,
The various "guesstimates" about while Federal spending for unemploytion.
the
possible or probable size of the ment compensation and ot'ner benefit
The start of this session is an appian
deficits
have sparked yet another programs rises. Both the decrease in
priate time to examine the upcoming
debate on the economics of deficit revenues and the increase in spending
Federal budget deliberations u ith an
spending. The most controversial inci- result
in a larger budget deficit. No
eye toward distilling the relationships
dent occurred before a seminar of the one can dispute
between deficits, Federal borrowing,
that process and its
American Enterprise Institute in early result. However
,
those who promote
and the economy. 'The debate about December 1981 when William A. Nisthis
notion
on
go
say that when the
to
the natuie and role of deficit spending kanen, a member of the President's
economy
recovers
the opposite will
,
has been joined. Some policymakers, Council of Economic Advisers, suggestoccur
and
the
deficit.
will shrink. Such
even within the Reagan White House, ed that deficits were not as important
"leap
a
misses
logic"
of
the point that
are downplaying the importance of as once thought. He discounted the
the
deficits
instance,
in
the
first
curbing deficit spending. Those who "crowding out" effect of deficits in the
recession induced or not, set
whether
are less than deeply concerned by the
Nation's credit markets. Coming after
latest deficit projections must not be the change in status of the priority of other econorric forces in motion that
allowed to hold sway while the rest of a balanced budget from a promise in make it more difficult for the economy
us remain silent. A rigorous analysis 1984 to a goal, such talk pi oduced jus- to recover. This analysis of the relaand defense of traditional fiscal tifiable outrage. The incident at the tionship between deficits and the
conservative reasoning on deficits, in- AEI seminar, however, was only one in economy is a prescription for doing
flation and interest rates are in order. series of instances inl.vhich the role of nothing.
The fourth and final major myth is
INTEIESTS RATES
deficits has been dowplayed.
centered
on the incoir.plete compariThere are four basic myths most freInterest rates reached record highs
son
that
other countries, notably
quently retold by those who challenge
last fall, peaking in October. Treasury
Japan
and
West Germany, run much
the
position
that deficits do matter as
bills, as a proxi for other market interest rates generally, are a good ex- the principal engine of inflation and larger deficits yet, have lower rates of
inflation and interest rates than we
ample of the latest trends. The peak interest rates.
The first myth is that deficits are do. The implicat ion is that the roa,d to
for 3-mont h Treasury bills was
not important because they are only a material happiness is paved by higher
reached on Noveniber 2, 1931, when
the interest rate hit 12.695 percent. small percentage of. GNP. A variation deficits. At n minimum. this view sugThe rate dipped to almost 10 percent on this theme is that a deficit of $50, gests a passix e approach to deficit
in early December. However, on Janu- or $75 or $100 billion is trivial in an spending.
ary 18, 1982, the rate went back up, economy producing in the range of $3 The comparison is incomplete bethis time to 12.505 percent. The rate trillion in gross national product. First cause several critical factors are missthe week before was 12.121 percent. let us look at. the issue within the ing. The most important misaing link
Six-month Treasury bills followed a framework of the comparison. Even is tin' comparative rate of sak.ing. As
similar path. The average rate on 6- assuming that the relationship be- noted earlier, deficits are financed by
month securities topped off at 13.619 tween deficits and GNP is the opera- savings, not by gross national product.
percent on October 26, 1981. On Janu- tive one, we must note that while the Japan and West Germaey have comary 18, 1982, the 6-month average rate
deficit as a percentage of GNP is cur- paratively larger deficits, but they also
was 13.102 percent, up from the previrently 2 percent, it is expected to have comparatively much la.rger rates
ous week's avera.ge of 12.806 percent. double to 4 percent by 1984, according of saving. Japan's rate is four times ;a;
The same is true for other rates—com- to Martin Feldstein of Harvard, under much as that of the United States.
mercial paper, New Aaa utilities, new
current conditions and policies. So West Germany's rate is twice as much.
Bait utilities, and bond buyer municiwhat, the GNP school will retort, 4 Specifically, the United States rate is
pals index of 20 bonds.
percent is still trivial in an economy of around 5.5 percent, compared to '20.2
Clearly, if the upward trend is not $3 trillion.
percent in Japan and 12.5 percent in
reversed, the interest rate sensitive
The important point is that compar- .West Germany.
sectors of the economy' will be dam- ing deficits to GNP is not very instrucThe key variable in the relationship
aged further. The auto, housing and
tive. The gross national product in- between deficit spending and the econconsumer durable sectors, and their
eludes designer blue jeans. record only
is the interaction of the supply of
supplier industries, are still recovering
albums, refrigerators, toasters. ac- savings and the borrowin demamis
g
of
from the high- interest rates of 1980 counting fees and baaeball bats. The
Governm
Federal
ent.
the
and 1981. -Economic recovery will be
Government does not finance deficits
THE TIP OE THE ICEBERG
shallow, at best, under these condiwith goods and services directly. Defishortfall
between revenues and
The
tions.
cits are linaneed in the credit markets
expendit
ures
the unified Federal
in
analysts
Many
have attributed the
of tile country, a point I will return to
budget that defines the size of the
shakiness of financial markets, at least shortly.
in par, to concern over Federal defiTile second myth is that deficits art. deficit is but the most visible and the
cits and inflation. Considering the
not important because there is enough most discussed component of national
fiscal poliCy. The problem of the
maennutle of some of the forecasts, money to go around for everyone
—pri- impact of the' Federal Government on
eeern is more than justified.
vate individuals, corporations, public
the Nation's credit markets
much
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broader than the figures on tile deficit
would indicate. The Federal Government borrows money, and heavily influences the borrowing of money, outside of the activities reflected in the
unified budget. The budget deficit is
literally but the tip of an iceberg. Appropria.tely enough, a November 1981
• newsletter of the Manufacturers Hanover Trust Co., carried the title, "The
Tip of the Iceberg," and outlined a
thorough analysis of the varied demands on the credit markets generated by the Federal Government. The
data compiled by author Irwin L.
Kellntr, senior vice president and
economist, should be must reading as
we commence the 1983 budget cycle.
Mr. Kellner writes:
in my view, Washington's inabilit to balance its books is even more important than
it appears. This is because the reported deficit is but the tip of the Federal financing
iceberg. And like the real thing. :that you
don't see can hurt you every bit as much as
what you do see, if you hit it.
Mr. Kellner's analysis shows that
the Federal presence in the Nation's
credit markets is indeed quite staggering. Quite candidly it wa.s almost
beyond belief, until I rea.d his complete description. In fiscal year 1981,
the Treasury had to cover a budget
deficit of about $58 billion. In addition, off budget spending was covered
through the Federal Financing Bank
at the level of $17 billion. Federally
sponsored activities totaled an additional $28 billion. Filially. the 0w:eminent assisted some private borrowers
over others through loan guarantee
arrangements, adding another $51.3
billion to the total. These four categories—the unified budget deficit, the
off-budget spending. the sponsored activities. and the loan guaxantees—
place the magnitude of Federal borrowing at $154.5 billion in 1981.
While Federal borrowing is more
widespread than reference to deficit
numbers would indicate, the pool from
which the total sum of borrowing
must be financed is smaller than many
analysts would have us believe.
As noted earlier when discussing several myths about deficits, Federal borrowing comes out of the simnIv of Sat:-
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For if they are not. more and mon
of national savings v.111 be preempted by
Washington. This will cause interest
rates to
remain high, the economy to remain
depressed and our potential to compet
e in
world markets to become seriously
dimin"
A
ittt• we going to accept this or are
we
ready to start scaling back the scope of
government to not oniy du more for ourselv
es.
but do it in a mote efficient way.
in a climate of less inflation and lowet interes
t
rates? Only time will tell.
why it is that the leadership of this institution is reluctant or unwilling to
even allow the House to consider,
much less adopt. the alternative of a
balanced budget through spending reductions. I am hopeful that the growing deficit projections and their implications, together with the expressed
sentiment of a large bipartisan group
of Members on the rule, will result in
action by the Rules Committee to
permit the offering of my substitute at
the appropriate time in the coming
session.
This is the question that the second
session of the 97th Congress will be
called upon to answer as the 1983
budget works its way throught the leg- THE ULTIMA7 P.; ANsWER IS A BALANCED BUDGET
The American people and their
islative process.
Mr. Kellner of Manufacturers Han- elected Tepresentatives at the State
level a.re actually way out in front of
over is not alone in his assessment
of
the Federal Government and • the Congress in perceiving the link becredit markets. While Kellner looke tween deficits and the economy and
d
back to the record of 1981, Henry the need fur a balanced budget.
Kaufman, chief economist for Salo- -A silent revolution has been tinder
mon Bros, released projections for way at the State level for quite some
1982 on January 4, 1982, for all credit time, and soon may be literally at our
areas. public and private. Under the door steps. Last week, Alaska became
heading "Summary and Conclusions," the 31st State of the Union to have its
legislature adopt a resolution calling
his report. states:
for
a constitutional convention limited
A confrontation between the credit
needs to consideration of an
of the U.S. Treasury and those of
amendment to
business require a
balanced budget. Only 3
corporations is shaping up for 1982.
This
conflict. which is not typical of the
more States, for a total of 34, are
earlv
neede
d before a convention would
stages of a recovery. promises to produce a
record level of net new credit market financ- become a reality. Nine States have
ing, and a substantial rebound in interest acted favorably in one house of
the
rates.
ltsgislature. Three of the nine have
Kaufman quantified the conflict by called upon Congress to submit a balprojecting a 1982 budget deficit of $80 anced budget amendment for ratificabillion, which be has since revised tion. A fourth State, Illinois, has done
the same.
upward to $90 billion. He notes that:
Put in another perspective, States
The ballooning Federal budget deficit and
repres
enting 72 percent of the U.S.
the borrowing needs of Federal credit agencies will push the growth in privately held population have either adopted a resoFederal debt up to a record $135 billion.
lution by one or both houses of the
Kaufman projects that the financing State legislature. If Illinois is added,
needs of the Federal Government in then 77 percent of the States on the
1982 will jump $22 billion over 1981. basis of population have acted in some
and absorb "nearly half the expected manner on this issue.
Congress must act to bring the Fedincrease in new funds available for all
eral
fiscal house in order before the
forms of credit." It goes without
State
s force us to act on a balanced
saying that Kaufman also projects a
budge
t. The American public is also tu
rise in interest rates by the end of the
line
with
the States on this issue.
year.
On
Janua
ry 12, 1982, the Los AngeFEDF.RAL SPENDING PAUST BE CUT
les Times and the Cable News Network
Economist Martin Feldstein of Har- releas
ed a nationwide poll. Of those
vard, president of the National Bureau surveyed.
40 percent th011fZilt that
a
ings. not out of the gros
- s- -national
product or other measures of the aggiegate economy. However, the definition of total savings is also important
in gaging the real impact of Federal
borrowing. Kellner defines total savings as gross private savings of households and corporations, plus State and
local government surpluses and capital
grants received by the United States
less net foreign investment and capital
consumption allowances. The latter
concept—capital consumption allow-:
ances—is very important. The capital
consumption allowance is the ainount
of savings necessary to maintain the
current stock of housing and capital in
the econc.ny. In other words, it is the
amount of credit needed just to stay
even. Excluding such an amount for
comparison purposes with Federal borrowing is quite reasonable, if one is
looking to gage the degree to which
the Government affects new activity
and economic growth. Certainly if the
economy is to follow a path of longterm recovery, and the United States
is to become competitive in world markets, plant to expansion and modernization will be critical. However, such
expansion and modernization will require that new credit is both available
and affordable.
On the basis of total Federal borrowing and the above definition of total
savings. Kellner calculates the percentage of savings consumed by Government borrowing at 78.8 percent in
1981. As recently' as 1979, this percentage was only 46.7 percent. No wonder
interest rates hit record highs in 1980
and 1981.
Kellner concludes with this challenge:
Going through this exercise makes it very
difficult to come up with any kind of an optimistic conclusion over where this economy
is headed. If this Administration cannot
eliminate the visible budget deficit, who else
will be able to do it?
Additionally, since more and more Federal
government credit demancLs take piace in
ways that are not measurable in the budget
but certainly are felt in the financial markets, how will these activities be brought
under control? That they have to be
brought under control there is no doubt?
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Federal Reserve Bank of St. Louis
()I Leuncinic nesearch, plit his linger balanced budget is the most important
on the problem and the solution in a step to cool inflation. Three-fourths of
Wall Street Journal editorial of Janu- the respondents believe that a ba.1ary 19, 1982. He wrote:
anced budget would at least be helpful
What then should be done to decrease the in the fight against Inflation.
deficit? The key is reducing federal nondeCongress should heed the answer to
fense spending. The overgrow th of govern- this question:
ment spending that has occurred in the pa.st
two decades would deserve substantial pruning even if there were no deficit. Much of
the increase in government spending during
these years has been due to the introduction and expansion of programs that are
wasteful and are the source of serious distortions in economic incentives.
Which do you think is the best v.ay for
the government to get the economy moving
again—should the government step up
spending in order to reduce unemployment
or should the government hold down spending in order to balance the budget?
Step tip spending
In July of last year, I released an in- Hold down spending
ventory of possible additional budget Not sure
rcer
16
62
14
cuts that totaled $52.3 billion. In SepConfirmation of this public perceptember and October 1 delineated each
tion
comes from Richard Wirthlin's
of the 272 specific items in a series of
conclusion
after examining data com12 special orders on the floor of the
his
finn, Decision Making Inby
piled
House. When the second budget resoformation,
last
month:
lution was considered in December
1981, I tried to persuade the Rules Of paramount importance to most voters
Committee to allow me to offer a sub- is the notion of balancing the budget. In
to see addistitute resolution embodying a revised order to do this, voters prefer
tional cuts in government spending rather
list of 310 cuts and a total of $42.7 bil- than resorting to tax inerea.ses.
lion. or 6 percent of projected outlays
CONCLUSION
in 1982. The Rules Committee reportindeed matter. Wall
do
Deficits
ed out a closed rule and no amend- 4
knows it, aS the Kellner and
Street
ments were in order. This followed a
Ka.uffinan reports make quite clear.
similar attempt in May of last year to
Street knows it, too, a.s found by
give the House a chance to balance the Main
Times/Cable News Network
L.A.
the
budget through spending reductions
poll and the MU survey. The States
which was also blocked by the Rules
have spoken. Congress must inoe
Committee. V.rhen the third resolution
toward a balanced budget in two ways
for 1982, or the first resolution for
during the new session: First, by sub1983, come to the floor, I will again
mitting an amendment on a balanced
seek to provide the House with an op- budget and tax limitation to the severportunity to meet Mr. Kellner's chalal States for ratification; and second,
lenge.
by making cuts in Federal spending
The vote on the closed rule last for fiscal years 1982 and 1983. The
month indicates that a large number long-term course must also include a
of Members, on both sides of the aisle, reexamination of off-budget. borrowing
are in favor of a more open process on activities of the Federal C.iovernment.
budget resolutions. The vote on the This will not be an easy task, but it is
rule was 248 in favor and fully 154 a necessary one if economic growth,
against it. Those opposed reflected a reduced inflation, lower unemploybipartisan division of 106 Republicans ment, and lower. interest rates are to
and 48 Democrats. This is a large become a reality.
number of negative votes on a procedural matter which Ls not normally
the subject of controversy. Quite candidly, one begins to wonder sometimes
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Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS
DF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
PAUL A. VOLCKER
CHAIRMAN
March 23, 1982
The Honorable Bill Bradley
United States Senate
Washington, D. C.
Dear Bill:
This is in response to your question. It raise
s
some further questions in my mind as to whether
the
conclusion is fully warranted, and I will check
further when next in contact with my counterpar
t,
just to make sure.
Sinc rely,
4,,
Enclosure
ate d9
BOARD OF GOVERNORS
cr THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Chairman Volcker
Rona
Ted Truman rNVAj
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Federal Reserve Bank of St. Louis
Date
March 22, 1982
Subject: Legal or Regulatory Constraints
on Liquidity Assistance in Germany
1"/P
In connection with Senator Bradley's question to you, we have
rechecked our understanding of various German banking regulations and
laws that might affect the provision of liquidity support to subsidiaries
of German banks operating outside of Germany.
(Our research included
contacting a German expert who is at the EC Commission and who is currently
a visitor at the Brookings Institution.)
Our conclusion is that aside
from the standard questions of whether lender-of-last-resort assistance
is appropriate there is no fundamental bar to the German authorities providing such assistance indirectly to foreign subsidiaries of German banks.
German banking is subject to certain principles (Grundsatz8 and
to certain legal restrictions on large loans (Grosskredite) as a percentage
of capital or equity.
Although loans to subsidiaries are subject to the
limits on large loans, there is no limit on the extent to which a bank
in Germany can put additional capital into its foreign subsidiaries aside
from an overall limit on the size of a bank's assets relative to its
capital and reserves.
Moreover, there are no limits on the purchase of
assets by German banks from foreign subsidiaries.
Thus, it would appear
that the Bundesbank is in a position to grant secured credit to a German
bank which, if the Grosskredite limit was binding, could either place
additonal capital into its foreign subsidiary or purchase assets from that
subsidiary in case of a run.
cc: Messrs. Dahl, Gemmill, Friedrich, Adams, and Ms. Brown (IF files)
March 19, 1982
The Honorable John D. Dingell
Chairman
tions
Subcommittee on Oversight and Investiga
Committee on Energy and Commerce
House of Representatives
Washington, D. C. 20515
Dear Chairman Dingell:
I am enclosing
As requested by your March 2 letter,
ing major computer models
completed questionnaires on the follow
icymaking process:
used by the Federal Reserve in the pol
• Quarterly Econometric Model
• Monthly Money Market Model
• Multi-country Model
stions on our response,
If your staff has any general que
in at 452-3766.
they may contact Mr. Edward T. Mulren
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Federal Reserve Bank of St. Louis
Sincerely,
Enclosures
Identical ltr. to:
Chairman
The Honorable Albert Gore, Jr.,
rsight
Subcommittee on Investigations & Ove
Committee on Science and Technology
House of Representatives
Wash., D. C. 20515
ETM:vcd (#V-56)
bcc: Mr. Mulrenin
Mrs. Mallardi (2)
›
,fdv dit-vtlzAi
1
Congre55 of the Uniteb liptatesi
pou5t ot tepregentatibto
iitlattington,;D.C. 20515
c_n
r"..4
^.17:
;
)
March 2, 1982
Honorable Paul A. Volcker
Chairman
Federal Reserve System
20th and C Streets, N.W.
Washington, D.C. 20551
Dear Mr. Chairman:
The Subcommittee on Oversight and Investigations of the
Committee on Energy and Commerce and the Subcommittee on
Investigations and Oversight of the Committee on Science and
Technology have asked the General Accounting Office to assist the
Committees in conducting a survey of the computer models used by
the Federal government. This survey is a continuation of our
examination of issues raised in hearings on National Strategic
Planning and is intended to complement some aspects of the work
being carried out by the Council on Environmental Quality.
The purpose of this survey is to identify and categorize
major computer models used by each agency in the policymaking,
policy evaluation, or program development process. It is not the
intent of the Committees to tie up staff time detailing models
which describe facets of programs, but to gather information on
those models which impact overall program policy.
The Committees request that the enclosed questionnaire be
completed for each of the major models in your agency and
returned to the Subcommittee on Investigations and Oversight,
Committee on Science and Technology by March_22,_1982. We
emphasize that this questionnaire has been designed so that it
will not take much time to complete by the people who manage and
operate the models. Also, we request that one person in your
office be designated as a contact person for our staff and the
GAO analysts who are assisting the committees in this study.
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If questions arise which are not answered by the attached
instruction sheet, please do not hesitate to contact either Mr.
John Bell at 225-2121 or Dr. John Clough at 225-2927.
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Federal Reserve Bank of St. Louis
Thank you very much.
Sincerely,
_Apr.„
J HN D. D 1GEL
HAIRMAN
Subcommittee on Oversight
and Investigations
Committee on Energy and
Commerce
//
/
L_
ALBERT GORE, JR.
CHAIRMAN
Subcommittee on Investigations
and Oversight
Committee on Science and
Technology
•
INSTRUCTION SHEET
To aid the House Committee on Energy and Commerce and the
House Committee on Science and Technology in a study on the
use of computer models in policymaking in the Federal
government, the Committees request that you fill out the
attached questionnaire. The purpose of this questionnaire is
to allow us to identify and categorize major computer models
used by each agency in the policymaking, policy evaluation,
and program development process. The questionnaire has been
designed so that it will not take much time to complete by
the people who manage and operate the models. Please
complete the questionnaire and return it to the appropriate
office in sufficient time that your agency can return all
questionnaires to the Committees by March 22, 1982.
1)
Please answer all questions.
2)
Do not check more than one answer per question unless the
question indicates that multiple answers are acceptable.
If more than one answer applies and multiple answers are
not allowed, choose the answer that is most applicable.
3)
Unless you are very uncertain about the answer to a
question, do not check the "Don't know" box. A
well-informed estimate is more acceptable.
4)
Additional comments are encouraged. However, such
comments should be placed on an additional sheet and
attached to the end of the questionnaire. If the
comments apply to particular questions, please refer to
the question by number.
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Federal Reserve Bank of St. Louis
t
I
ELLIIDE II BASIC. DATA
1)
Person responding
Position
Organization name
Mailing Address
Telephone Number
2)
Model or Project Name
General Area of Model (e.g. monetary policy, crop
forecasting)
Name of Project Director
3)
Please provide a brief description of the model and its
objectives. Describe it as you would to a senior official.
Use additional paper if necessary and attach to back of
questionnaire.
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Federal Reserve Bank of St. Louis
•
4)
Describe the model in terms of its general type.
( )
Input/Output
( )
Econometric
( )
System Dynamics
( )
Linear Programming
( )
Nonlinear Programming
( ) Dynamic Programming
5)
( )
General Equilibrium
( )
General Simulation
( )
Other (specify)
How good is the documentation of the model from a policy
maker's (senior official) point of view? from a programmer's
point of view?
Policy
Maker
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Programmer
The documentation can be understood easily and
the results used correctly with a minimum of
phone calls.
The documentation exists in some form, but it
would be hard to be sure one was using the
results correctly without at least some
discussion with the originators of the model.
It would almost be impossible to be sure one
understood the results without extensive
assistance.
No written documentation exists
( )
Don't Know
I
6)
If documentation exists, where may be it be obtained?
If one had further questions about the model, who would be
the best person to talk to? Name
Telephone Number
BECTION II: MODEL DEVELOPMENT
7)
In what part of the sponsoring agency was the idea of the
model first considered? Name of Division/Branch/Office
Which of the following best describes the
Division/Branch/Office?
8)
( )
Policy Level (e.g. Office of the Secretary)
( )
Program Level
( )
Other (specify)
What was the principal motivation for undertaking development
of the model?
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( )
The model offered a solution to an existing,
specific problem.
The model offered a solution to an anticipated
problem.
Other (specify)
$
9)
When was the model first used or applied (unless a major
redirection of the purpose of the model occurred, please
ignore major and minor changes in the model)?
( )
0 - 6 months ago
( )
6 - 12 months ago
( )
1 - 2 years ago
( )
2 - 3 years ago
( )
3 - 5 years ago
( )
More than 5 years ago
( )
Don't Know
•
10) Where was the model developed?
( )
Responding Agency
( )
Another branch of the Federal Government
( )
Under Government Contract
( )
Not under Government Contract
( )
Other (specify)
( )
Don't Know
11) What was the cost of development to the responding agency?
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Federal Reserve Bank of St. Louis
( )
Less than $25,000
( )
$25,000 to $49,000
( )
$50,000 to $99,999
( )
$100,000 to $249,000
( )
$250,000 to $499,999
( )
$500,000 to $1,000,000
( )
Over $1,000,000 (Rough Estimates $
( )
Don't Know
)
I
.
12) When was the last major revision in the model? minor
revision? update? (Revisions are changes in the model
structure. Updates are expected changes in data, etc. to
reflect current conditions.)
Major
Revision
Minor
Revision
Update
0 - 3 months ago
3 - 6 months ago
6 - 12 months ago
12 - 24 months ago
Over 24 months ago
Don't Know
13) What are the frequency of the planned revisions?
Planned
Revisions
Planned
Updates
()
( )
0 - 3 months
()
( )
3 - 6 months
()
( )
6 -9 months
()
()
9 - 12 months
( )
( )
Over 12 months
( )
( )
No fixed schedule
14) Where are the revisions done?
planned updates?
updates?
Revisions
Updates
( )
( )
At Responding Agency
( )
( )
At Another Government Agency
( )
( )
Under Government Contract
( )
( )
Not Under Government Contract
()
( )
Other (specify)
.
.
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Federal Reserve Bank of St. Louis
,
•
15) What review or evaluation has been made on this model?
than one if more than one applies.
( )
Internal (specify)
( )
External (specify)
( )
Audit (e.g. G.A.O., specify)
( )
Other (specify)
( )
No review or evaluation has been performed
( )
Don't Know
aELTIQE MI_ MODEL USE
16) Who is the person responsible for the use of the model?
( ) Project Director
( ) Other (specify) Name
Position
17) How many professional staff work with the model?
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( )
One
( )
Two
( )
Three to Five
( )
Five to Ten
( )
More than Ten (Rough Estimate)
( )
Don't Know
Check more
18) How is the model used? Describe in terms of originally intended
use and actual use to date.
Original
Actual
( )
( )
Forecasting
( )
( )
Problem Analysis
( )
( )
Selection Among Policies or Programs
( )
( )
Development of Policies or Programs
( )
( )
Evaluation of Policy or Program Effectiveness
( )
( )
Other (specify)
19) How often is the model used for problem solving?
policy input?
Problem
Solving
Policy
Input
( )
( )
Weekly
( )
( )
Monthly
( )
( )
Quarterly
( )
( )
Semiannually
( )
( )
Annually
( )
( )
Less Than Annually (Rough Estimate
)
20) What is the cost of a typical run? of typically solving a problem?
of generating policy input?
Typical
Run
()
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Federal Reserve Bank of St. Louis
Problem
Solving
Policy
Input
Less than $10
$10 to $99
$100 to $499
$500 to $999
$1000 to $5000
Greater than $5000 (Rough Estimate
.
.
t
21) What is the average monthly computer bill for the model?
Less than $100
$100 to $999
$1000 to $4999
$5000 to $10,000
More than $10,000 (Rough Estimate
)
22) What is the yearly cost of the model? Figure by taking average
monthly bill times twelve and adding average salary times
equivalent staff-years?
( )
Less than $1000
( )
$1000 to $4999
( )
$5000 to $9999
( )
$10,000 to $49,999
( )
$50,000 to $249,999
( )
$250,000 to $1,000,000
( )
Over $1,000,000 (Rough Estimate
( )
Don't Know
)
23) How is the model "backed up" (i.e. where are up to date copies of
the program kept)? Check more than one if applicable.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
( )
Disc Packs
( )
Tape Storage
( )
Cards
( )
Program Listing
( )
Nothing
( )
Don't Know
24) Where are the program runs made?
()
Computer operated within the agency
Computer operated by Federal government but
outside agency
( )
Computer operated by contractor
( )
Don't Know
25) How are the program runs made?
( )
In a batch mode by agency personnel
( )
In a time-sharing mode by agency personnel
( )
In a batch and time-sharing by agency
personnel
( )
By other Government Personnel (request made to
them and they execute the run)
( )
By Non-Government Personnel (at the request of
the agency)
( )
Other (specify)
( )
Don't Know
26) Describe the data base used by the model?
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Federal Reserve Bank of St. Louis
( )
Contained within the model
( )
External to the model
( )
Other (specify)
.
A.
a
‘
27) Where were/are the data obtained?
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Federal Reserve Bank of St. Louis
( )
Publications
( )
Responding Agency Work
( )
Other Government Agency
( )
Under Government Contract
( )
Not Under Government Contract
Other (specify)
.
• •..
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ili144,1
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f
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
▪ ,•••:„ , 1.1
• •.... • •
WASHINGTON, O. C. 20551
March 19, 1982
PAUL A. VOLCKER
CHAIRMAN
The Honorable Benjamin S. Rosenthal
Chairman
Subcommittee on Commerce, Consumer, and
Monetary Affairs
Committee on Government Operations
House of Representatives
Washington, D. C. 20515
Dear Chairman Rosenthal:
I am pleased to respond to your letter of March 2
concerning advertising of Individual Retirement Accounts (IRAs)
by member banks. As you are aware, effective December 1, 1981,
the Depository Institutions Deregulation Committee established
a new category of deposit with a minimum maturity of eighteen
months whose interest rate was not constrained by rate ceilings.
The purpose of this action was to provide persons saving for
their retirement with a market-related rate of return. The
Committee believed that the deregulation of IRA (and Keogh)
deposit rate ceilings will enable depository institutions to
compete effectively with other organizations offering IRA
investment vehicles and encourage individuals to save for their
retirement. As a result of this action, the competition among
depository institutions for IRA funds has been quite vigorous.
We estimate that depository institutions have received $4.9
billion of IRA funds as of the end of February 1982. The new
deposit instrument provides significant advantages to IRA
participants and enables depository institutions to compete
effectively with nondepository institutions such as money market mutual funds and insurance companies.
To date, we have received only one complaint concerning
IRA advertising. A copy of this complaint is enclosed as you
have requested.
You have also asked if we have conducted any inquiry
into misleading or deceptive practices in connection with IRA
advertising. As part of the normal examination process, Federal
Reserve examiners review all advertising being conducted by
State member banks. To date, our examiners have not cited any
banks for IRA advertising. We believe that the Board has adequate authority to deal with misleading or decel5tive practices
by member banks. This authority is based principally upon
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
The Honorable Benjamin S. Rosenthal
Page Two
section 19(j) of the Federal Reserve Act, 12 U.S.C. 371b, which
authorizes the Board, after consultation with the Federal Home
Loan Bank Board dnd the Federal Deposit Insurance Corporation,
to prescribe rules governing the advertisement of interest on
deposits. We believe this authority, in conjunction with the
authority of the other agencies, is adequate to deal with misleading and deceptive advertising by all depository institutions.
While the ability to offer a ceiling-free rate of interest on IRA funds may have lessened the need for depository
institutions to resort to nonmonetary devices to attract funds,
I am concerned with the potential that deceptive advertising
could have upon the competitive balance among the depository
institutions. We are reviewing the possibility of adopting
guidelines on IRA advertising practices; however, it does not
appear that the advertisements we have seen to date have been
misunderstood by the public. You can be assured that we will
continue to work with the other agencies to determine if guidelines are required in this area.
Sincerely,
„Wail'& Volcker
Enclosure
(Ltr. dated 2/9/82 to Chrmn. Volcker from Milton
Gwirtzman, former Chairman, National Commission
on Social Security)
GTS:vcd (#V-47)
bcc :
Gil Schwartz
Dolores Smith
Mrs. Mallardi (2)/
410
BENJ"MIN S. ROSENTHAL, N.Y.. CHAIRMAN
1
JOHN OINYERS, JR., MICH.
EUGENE V. ATKINSON, PA.
STEPHEN L. NEAL, N.C.
DOUG BARNARD, JR., GA.
PETER A. PEYSER, N.Y.
LYLE WILUAMS, OHIO
HAL DAUB. NEBR.
WIU_IAM F. CLINGER. JR., PA.
JOHN HILER, IND.
NINETY-SEVENTH CONGRESS
CongrefsiS of the Eniteb tate5
MAJORITY-(202) 225-4407
3bott5e of Repre5entatibef
COMMERCE. CONSUMER. AND MONETARY AFFAIRS
SUBCOMMITTEE
OF THE
COMMITTEE ON GOVERNMENT OPERATIONS
RAYBURN HOUSE OFFICE BUILDING. ROOM B-377
WASHINGTON. D.C. 20515
March 2, 1982
Li\
Hon. Paul A. Volcker, Chairman
Board of Governors
Federal Reserve System
Washington, D.C. 20551
Dear Mr. Chairman:
The Commerce, Consumer and Monetary Affairs Subcommittee is reviewing
advertisements for Individual Retirement Accounts (IRA) and other IRA sales
information materials used by certain institutions under your regulatory supervision. As a result of this review, I am concerned that the public may be
receiving inadequate and, in some cases, misleading and deceptive information.
Spcifically, some of the following appear to be problem areas:
IRA ads that claim consumers can become millionaires by the time they retire do not take into account
the effect of inflation on their savings;
The ads often do not specify whether interest is
simple or compounded;
The interest rates stated in some IRA ads do not
approximate actual yields;
The ads often do not indicate that the rates may
change over the term of the investment;
Internal Revenue Service penalties for
withdrawals are not stated in some ads.
early
Enclosed is a sample of a few ads placed by banking and thrift institutions which
present one or all of the problems indicated. While the specific institutions
named in the ads may not be under your supervision, I intend the sample simply as
evidence of the problem. I also enclose a copy of an article describing the
problem.
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Federal Reserve Bank of St. Louis
•
2
As you may know, the New York City Department of Consumer Affairs has issued
guidelines calling for disclosure of IRS penalties for early withdrawals and of
the assumptions behind any projection of long-term earnings. They also require a
clear statement that interest rates will not remain constant and that the ultimate yield is likely to differ from the sample yield in the projections. Additionally the Department is concerned about consumers' confusion as to whether the
proffered rate is compounded or simple interest and it asks that this be made
clear in ads for IRAs. A copy of New York City's Guidelines is enclosed.
I am writing to you now to ask that you inform the subcommittee of the
following:
1.
Has your agency received any consumer complaints concerning ads for IRAs?
If so, please supply copies of such complaints. What action has been taken?
Please supply copies of letters to financial institutions under your jurisdiction which criticize or require changes in IRA ads.
2.
Has your agency conducted any inquiry or analysis of misleading or deceptive
practices in connection with IRA ads? If so, please supply a summary of any
action taken. If not, please review the issues raised by possibly misleading or deceptive IRA ads and inform the subcommittee of your findings.
3.
Does your agency have the authority to deal with misleading or deceptive
advertising to attract IRAs or other kinds of deposits? Please specify such
authority.
4
How does your agency monitor misleading ads for IRAs or other new forms of
savings or deposits?
5.
Has your agency considered issuing guidelines or taking any other steps to
deal with this problem?
Please respond by March 19, 1982.
Ted Jacobs at 225-44077--- __
If you have any questions please contact
Sinc rely,
Benja,in S. Rosenthal
Chairman
BSR:jv
Attachments
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Federal Reserve Bank of St. Louis
Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Advertisements, magazine article
Citations:
Number of Pages Removed: 14
“How To Earn Over $1,000,000 Sitting Down.” East New York Bank, 1982.
“Save $2,000 A Year. Retire On A Million.” Dry Dock Savings Bank, 1982.
“Which One Will Retire A Millionaire?” Shawmut Banks, 1981.
“Retire A Millionaire By Working An Extra Half Hour.” Shawmut Banks, 1982.
“Retire A Millionaire For Just $166.66 A Month.” West Side Federal Savings Bank, 1981.
“Bring In A Friend To Open An IRA Account…” Republic National Bank of New York, 1981.
“One Of The Most Important Tax Shelter And Retirement Opportunities…” Central Fidelity
Bank, 1982.
“The IRA Loan.” County Federal Savings and Loan Association, 1982.
“I Wouldn't Open an IRA…And Other Myths.” Home Savings Bank, 1982.
Egan, Jack. “The Bottom Line: That IRA Million Doesn't Really Add Up.” New York Magazine,
January 18, 1982.
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
DEPARTMENT OF CONSUMER AFFAIRS
80 LAFAYETTE STREET. NEW YORK. NEW YORK 10013
Telephone: 566Bruce C. Ratner. Commissioner
.
GUIDELINES ON ADVERTISING OF
INDIVIDUAL RETIREMENT ACCOUNT (IRA)
PLANS BY FINANCIAL INSTITUTIONS
Promulgation of misleading adverising is prohibited by various
state and federal regulatory agencies concerned with banks and
savings-and-loan institutions. In addition to any other disclosures required by state or federal law, the New York City
Consumer Protection Law requires the following with respect to
any advertisement, in any medium, which refers, directly or
indirectly, to Individual Retirement Accounts:
1. The advertiser must clearly and conspicuously disclose
the mandatory IRS penalties for withdrawal of IRA funds prior to
age 59-1/2, including the fact that there will be serious tax
consequences in addition to the 10% withdrawal fee. If there are
additional penalties tied to the particular IRA instrument (e.g.,
penalties attached to early withdrawal from long-term certificates
of deposit) these must also be disclosed.
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Federal Reserve Bank of St. Louis
Rationale:
Consumer Protection Law Regulation 204 mandates disclosure of
all material conditions attached
to an offer. Inability to withdraw funds without incurring
serious penalties is a material
condition which could substantially affect the consumer's
decision to invest in an Individual Retirement Account.
Sample Disclosure Language:
"Withdrawals before age 59-1/2
permitted, but only with substantial tax and interest
penalties."
"IRS regulations impose substantial tax and interest penalties for withdrawal before age
59-1/2. In addition, the bank
•
is required by law to impose a
further penalty for premature
withdrawal from a [certificate
of deposit, etc.]."
2. The advertiser must clearly and conspicuously disclose
the assumptions behind any projected long-term earnings on an IRA
account, whether these projections are couched in the form of prose
statements, or in charts, graphs, or other visual representations
purporting to depict accrued earnings. Such assumptions must be
reasonable.
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Federal Reserve Bank of St. Louis
a. If an institution chooses to advertise projections
based on a constant long-term interest rate, the advertisement must contain a clear and conspicuous warning that the
interest rate upon which the projection is based is not
guaranteed for the term of the investment, and that in fact
the ultimate yield to a consumer is likely to differ from
the yield stated in the projection.
b. The advertiser may not otherwise state, suggest,
or imply that interest rates at the bank or savings-andloan institution will remain constant over a period in
excess of the term of the specific investment instrument
(long-term CD, etc.).
Rationale:
Consumer Protection Law
section 2203d-2.0(a) forbids the
use of statements or other representations which have the capacity, tendency, or effect of
deceiving or misleading consumers.
Charts or statements projecting
long-term earnings without a clear
and conspicuous warning that such
projections are based on an assumption of a constant interest rate
over a long-term period are
inherently misleading.
Sample Disclosure/Warning Language:
"For illustrative purposes only.
Calculations based on 12% annual
interest rate, compounded daily
[monthly, quarterly, etc.].
Since interest rates are variable
and cannot be predicted, there is
no guarantee that the amount projected will in fact be the amount
available in your account when
you retire."
2
"Chart based on 12% interest
(12.94% effective yield) per year.
Projections are for demonstration
purposes only and are not guaranteed. Your actual yield will
probably differ from the yield
depicted in the chart."
3. In advertising specific IRA instruments at specific
rates of interest, the advertising must clearly and conspicuously
disclose the annual rate of simple interest and the term of the
investment.
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Federal Reserve Bank of St. Louis
a. The advertisement must indicate whether the interest
will be compounded and, if so, on what basis.
b. Where a percentage yield achieved by compounding
is advertised, the basis of the compounding must likewise
be disclosed.
c. If the term of the investment is in excess of a
year, and if the interest is not compounded, then the
effective annual yield must argE be clearly and conspicuously disclosed.
Consumer Protection Law section
2203d-2.°(a)(2) forbids the use,
in any oral or written representation, of ambiguity as to a
material fact, or failure to
state a material fact. In order
to compare offers and choose the
best instrument for an IRA investment, the consumer must possess
the basic information outlined
above. Ambiguity as to whether
interest will be compounded, when
it will be credited, and/or annual
yield makes such informed choice
impossible.
Rationale:
Sample Disclosure Language:
"30-month long-term certificate
of deposit. 12% interest, compounded daily, .credited monthly,
for an effective annual yield of
12.93%."
3
4. The advertiser must clearly and conspicuously disclose
any charges imposed for handling an IRA investment, indicating
whether these are one-time or recurring charges.
Rationale:
Consumer Protection Law Regulation 204 mandates disclosure of
all material conditions attached
to an offer. Handling charges
or administrative fees constitute
such a material condition since
they could affect the consumer's
choice of a particular IRA investment instrument.
Sample Disclosure Language:
"Each account will be subject to
a $10 annual service charge."
5. If a particular IRA investment instrument is advertised,
the advertiser must clearly and conspicuously disclose the nature
of that instrument. If it is not a deposit and therefore not
insured by the applicable federal agency (FDIC, FSLIC, etc.), that
fact must likewise be clearly and conspicuously disclosed.
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Federal Reserve Bank of St. Louis
Rationale:
Consumer Protection Law Regulation 204 mandates disclosure of
all material conditions attached
to an offer. Absence of federal
insurance is such a material condition in that it could affect
the consumer's choice of a particular IRA investment instrument.
Sample Disclosure Language:
"This is a retail repurchase
agreement. It is not a deposit
and is not insured by the [FDIC]."
4
1
•
'
•c) Got, •.
•0
R •
BOARD OF THVERNORS
•.
co
.
*0
• -n
FEDERAL RESERVE SYSTEM
• --1
WASHINGTON, 3. C. 20SSI
• rc`
•
March 18, 1982
PAUL A. VOLCKER
CHAIRMAN
The Honorable Henry S. Reuss
Chairman
Joint Economic Committee
Washington, D. C. 20510
Dear Chairman Reuss:
Thank you for your letter of February 26 forwarding
a copy of the Annual Report of the Joint Economic Committee.
Your letter calls our attention in particular to Recommendation 8 of the Democratic Members of the Committee which calls
upon the Federal Reserve to review various aspects of monetary
policy and report to the Congress.
I approach your recommendation with mixed feelings.
We start from common ground in believing that the techniques
and procedures of monetary policy warrant periodic--indeed
continuous --review to assure their suitability. Such reviews
are, of course, valuable for our internal purposes and have
obvious benefit in teLms of the Federal Reserve's ability to
communicate our policies to the Congress and the public and
in turn satisfy the need for accountability. They are all
the more significant in a period of rapid change and innovation in financial practices, encompassing financial instruments,
institutions, and markets.
At the same time, the Report's characterization of
recent evidence as indicating "fundamental flaws in the procedures of monetary formation and oversights" seems to me
unwarranted on the basis of the evidence we have. Of course,
it will never be possible to devise techniques which are good
for all time, nor to reduce complexities to simplicities; every
procedure for formulating and implementing monetary policy
represents something of a compromise among competing objectives,
and can be modified and improved over time. The real difficulties in the current situation lie not in the technical implementation of monetary policy, but rather in reorienting the
modes of behavior throughout the economy away from an adaptation to inflationary expectations toward greater price stability.
These difficulties are compounded to the extent almost exclusive
reliance is placed on monetary policy to combat.inflation,
financial markets are burdened by excessive budgetary deficits,
and by rigidities in the price-wage structure.
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Federal Reserve Bank of St. Louis
The Honorable Henry S. Reuss
Page Two
As you know, some of the technical issues of monetary
policy were investigated in a major Federal Reserve study last
year. The results were published in 1981 in a two-volume study,
New Monetary Control Procedures: Federal Reserve Staff Study.
This study received considerable professional attention and
is
the subject of continuing academic review and public discussi
on.
I do not believe that it would be productive at this time for
the Federal Reserve to convene a panel of outside advisers with
disparate opinions in the thought that some new consensus would
spontaneously emerge from such a discussion that has escaped
the notice of those of us responsible for conducting policy.
You are as aware as I of the variety of professional opinion
and schools of thought, taking as their point of departure different analytic frameworks. I believe it far more likely that
constructive criticism and analysis would emerge from a continuing process of reaction to concrete policy proposals, actions, and studies by the Federal Reserve.
To facilitate that process, and as part of our continuing effort to expose and test our thinking against that of
others, I have asked our staff to address the specific points
raised in your Report, drawing on available research findings
and internal thinking, and to report their findings in convenie
nt
form. I intend to submit that report, including any recommen
dations to the Congress by the Board that are relevant, as part of
our next regular Report to the Congress on Monetary Policy pursuant to the Full Employment and Balanced Growth Act of 1978.
The results of this study will, of course, be available
to the public generally, as well as to professional specialists,
and we will look forward to reviewing these issues with the
Congress and others who are interested. I do want to thank you
for your concern for the improved conduct of economic policy
in general and monetary policy in particular, to which I hope
the report I have described, addressing the particular questions
you have raised, will contribute.
Sincerely,
_sLe#411.,
NS:PAV:vcd (V-53)
bcc:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Mr. Axilrod
Mrs. Mallardi (2)./
frotti.
HOUSg OF REPREsENTATIVES
HENRY S. RCUSS, WIS.. CHAMMAN
RICHARD BOLLING, MO.
LEE H. HAMILTON, IND.
GILLIS W. LONG, LA.
PARRLN J. NETCHELL. MD.
FREDERICK W. RiCHMOND. N.Y.
CLARENCE J. •RowN. Gulp
MARGARET M. HECKLXR, mASS.
JOHN H. FIOUSSELDY. CALIF.
moo
CHALMERS
p.
1111:14ATZ
Congres'5 of tbe Ziniteb z.-ztette5
JOINT ECONOMIC COMMITTEE
(CREATED PURSUANT TO SEC. SW or mimic LAw 304, irrH coNOREss)
JAMEs K. GALIBRAm4,
111:xxcuTiVi outECTOR
WASHINGTON, D.C. 20510
ROGER VI. JEPS[3.4..
VICE CHAIRMAN
WILLIAM V. IIK7T34.
JAMES AJIDNOR, S. OAK.
SITEVEN D. SYMMS. 10A340
PAULA KA WK I NS, FLA.
IIKAC K MATTINGLY. GA.
LLOYD BENTSEN. TEX.
WILLIAm PROXMIRE, WIS
EDWARD M. KENNEDY. MASS.
PAUL S. SAIRMANIES, MD.
February 26, 1982
The Honorable Paul A. Volcker
Chairman
Board of Governors
Federal Reserve System
Washington, D. C.
Dear Mr. Chairman:
I am enclosing a copy of the Annual Report of the Joint Economic Committee, released yesterday. In it, the Democratic Members of the Committee call on the Federal Reserve to undertake a
searching review of current procedures of monetary policy formation and oversight. The purpose of such a review would be to
develop a more flexible and sophisticated framework within which
the Federal Reserve can operate while enhancing the quality of
information about monetary policy available to Congress and the
public.
The specifics of our request are set out in Recommendation 8.
I would appreciate an early response outlining the measures you
deem appropriate to meet this request. Specifically, I would encourage you to consider calling on a distinguished panel of outsiders to provide advice to the Federal Reserve on it. We regard
this recommendation as one of the key ingredients of a program to
establish a more workable relationship between the Congress, the
Administration and the Federal Reserve in the future.
Sincerely,
(1.A..4-..(Th S. g-tAi..-a„
Henry S. Reuss
Chairman
P.S. I commend Recommendations 9 and 10 to your attention as well,
for reasons that will be apparent.
Enclosure
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
THE 1982
JOINT ECONOMIC REPORT
REPORT
OF THE
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ON THE
1982 ECONOMIC REPORT OF THE PRESIDENT
,I.
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Federal Reserve Bank of St. Louis
Recommendation No. 7:
End the Interest Rate Wars
st rates damaged the world
In 1981, U.S. high intere
ence in the economic
id
nf
co
ed
in
rm
de
un
d
an
y
econom
States. These severe
leadership of the United
must not be allowed to
s
on
si
us
rc
pe
re
l
na
io
at
intern
competition should be
te
ra
st
re
te
in
gh
Hi
.
ue
contin
rnational coordination of
te
in
er
os
cl
ch
mu
by
ed
replac
economic policy.
ove Federal Reserve
pr
Im
8:
.
No
on
ti
da
en
mm
Reco
Coordination
Accountability and Policy
ence has mounted that
For the past decade, evid
s in the procedures of
aw
fl
l
ta
en
am
nd
fu
e
ar
e
ther
re only
ersight. These flaws we
ov
d
an
n
io
at
rm
fo
ry
ta
mone
to
ift from interest rate
sh
e
th
by
d
te
ec
rr
co
ly
part
ange
r 1979; indeed, that ch
be
to
Oc
in
g
in
et
rg
ta
ry
r
moneta
to the fore. We call fo
es
ti
ul
ic
ff
di
w
ne
t
gh
ou
br
has
a fresh look at the
ke
ta
to
e
rv
se
Re
l
ra
de
Fe
e
th
rt to the Congress.
po
re
d
an
cy
li
po
ry
ta
ne
formation of mo
:
ve six specific objectives
ha
ld
ou
sh
rt
po
re
a
ch
Su
information about
To improve the quality of
es made available to
monetary policy objectiv
blic;
the Congress and the pu
on of monetary
To improve the coordinati
and other tools of
policy, fiscal policy,
economic policy;
r the conduct of
To provide guidelines fo
s of rapid financial
monetary policy in time
monetary instruments;
innovation and change in
r the conduct of
To provide guidelines fo
ce of supply shocks;
monetary policy in the fa
ity in recent years of
To evaluate the instabil
recommend changes in
d
an
y,
ne
mo
r
fo
nd
ma
the de
es that may be
monetary policy procedur
is development; and
th
of
lt
su
re
a
as
y
ar
necess
tee that Federal
To devise ways to guaran
account of the
Reserve policy takes full
dustry, agriculture,
in
of
s
st
re
te
in
te
ma
legiti
small business and
and commerce, including
e Federal Reserve
th
in
ed
at
ul
ip
st
as
housing,
Act.
Run Money Volatility
tor
Sh
ry
Ve
9:
.
No
Recommendation
is Not a Problem
very short -run
at
th
ew
vi
e
th
th
wi
We disagree
antly damaged the
ic
if
gn
si
th
ow
gr
y
ne
volatility of mo
criticism of the
is
th
at
th
ge
ur
We
.
economy in 1981
ensed with.
Federal Reserve be disp
Recommendation No. 10:
Reject the Gold Standard
All forms of a return to the gold standard should
be rejected by the President, the Administration, and
the Congress.
C.
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Federal Reserve Bank of St. Louis
Fiscal Policy:
Recommendations 11-18
Recommendation No. 11: Promote Economic Recovery Now
and a Return to a Balanced Budget
The tax cuts scheduled to go into effect on July 1,
1983, should be deferred, and reviewed in light of the
economic situation and the state of the budget next
year. Indexation of the personal tax brackets to the
Consumer Price Index should be repealed. This clear
signal of responsible future tax behavior, with its
resulting sharp diminution of the future deficit, will
help to lower interest rates now, thus providing needed
stimulus and promoting a rapid recovery from the present
recession.
Recommendation No. 12:
Review Tax Expenditures
Efforts to raise additional revenues in later years
should begin with a comprehensive review of tax
expenditures.
Recommendation No. 13:
Excise Taxes
We oppose regressive increases in Federal excise
taxes solely to balance the budget. Such excise tax
increases are inflationary and unfair in their
incidence. Excise tax increases should be considered
only where they serve a compelling public interest.
Recommendation No. 14:
No Value-Added Tax
We oppose proposals to institute a national sales
tax or value-added tax. Such a tax would fall
disproportionately and unfairly on low- and middleincome people, thereby compounding the loss in real
income they have suffered in recent years. In addition,
introduction of a VAT would add to inflation in the
short run.
Recommendation No. 15:
Corporate Taxes
The Economic Recovery Tax Act of 1981 provided for
accelerated depreciation as we had recommended in our
last Report. However, there remains a danger that, as
the rate of inflation falls, the new system will become
distorted in favor of equipment and machinery and
against long-lived structures at lov rates cf inflation.
Should this happen, consideration should be given to
measures such as open accounting, which would restore
neutrality of the depreciation schedules with respect to
types of investment, and eliminate any danger of
negative effective tax rates. Provisions providing for
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Federal Reserve Bank of St. Louis
Beyond that, the Administration should embark on a concerted
program of negotiations to assure macroeconomic policy
coordination with our major allies, both at and between
economic summits.
Recommendation No. 8: Improve Federal Reserve
Accountability and Policy Coordination.
For the past decade, evidence has mounted
that there are fundamental flaws in the
procedure of monetary policy formation and
oversight. These flaws were only partly
corrected by the shift from interest rate to
monetary targeting in October 1979; indeed,
that change has brought new difficulties to
the fore. We call for the Federal Reserve to
take a fresh look at the formation of monetary
policy and report to the Congress. Such a
report should have six specific objectives:
To improve the quality of information
about monetary policy objectives made
available to the Congress and the public;
To improve the coordination of monetary
policy, fiscal policy, and other tools of
economic policy;
To provide guidelines for the conduct of
monetary policy in times of rapid
financial innovation and change in
monetary instruments;
To provide guidelines for the conduct of
monetary policy in the face of supply
shocks;
To evaluate the instability in recent
years of the demand for money, and
recommend changes in monetary _policy
procedures that may be necessary as a
result of this development; and
To devise ways to guarantee that Federal
Reserve policy takes full account of the
legitimate interests of industry,
agriculture, and commerce, including
small business and housing. as stipulate:3
in the Federal Reserve Act.
-158-
1981 was a year of emerging dissatisfaction with the
procedures of monetary policy formation and oversight.
It
has become clear that the current system of multiple
aggregate monetary targeting does not provide an adequate
guide to the complexities of the current monetary
environment, or an adequate yardstick by which to measure
the success or failure of the Federal Reserve's performance.
On the other hand, no plausible alternative to the present
system has been articulated and given a full professional
review by competent specialists.
We therefore recommend
that the Federal Reserve undertake the task of developing
necessary improvements in the process of monetary policy
formation and oversight.
The two principal objectives of monetary policy reform
must be to provide for accountability of the Federal Reserve
System and for the coordination of monetary policy with
fiscal policy, incomes policy, and other initiatives of the
Executive branch and the Congress.
serves neither objective.
The present system
For reasons which will be
discussed below, the system of annual reporting of monetary
growth targets no longer provides an adequate gauge of
Federal Reserve performance if it ever did; a new system
must be designed which holds the Federal Reserve more
closely accountable for the ultimate objectives of growth,
employment, and price stability, without sacrificing the
quality of information available to the Congress.
As for
policy coordination, that presently depends on the personal
chemistry between the Chairman of the Federal Reserve Board,
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Federal Reserve Bank of St. Louis
-159-
al
und institution
o
s
A
.
s
s
e
r
g
n
o
and the C
the President,
tly needed.
n
e
g
r
u
is
n
o
i
t
a
n
basis for coordi
ary
es of the monet
v
i
t
c
e
j
b
o
e
h
t
t
ppor
We continue to su
and
Full Employment
s
n
i
k
w
a
H
ye
r
h
p
m
of the Hu
policy reforms
s the change in
a
l
l
e
w
s
a
,
8
7
9
h Act of 1
Balanced Growt
est
dures from inter
e
c
o
r
p
y
c
i
l
o
p
monetary
Federal Reserve
of 1979. The
r
e
b
o
t
c
O
in
g
n
i
t
y growth targe
rate to monetar
r
under which, fo
e
r
u
d
e
c
o
r
p
a
s law codified
Humphrey-Hawkin
red to present
i
u
q
e
r
s
a
w
e
v
r
e
s
the Federal Re
the first time,
he
bjectives at t
o
y
c
i
l
o
p
y
r
a
t
e
s its mon
to the Congres
in
re formulated
we
s
e
v
i
t
c
e
j
b
o
ch year. These
beginning of ea
rious monetary
a
v
of
s
e
t
a
r
h
t
s for the grow
terms of target
quarter basis.
h
t
r
u
o
f
o
t
r
e
t
r
the fourth-qua
aggregates on
s of real GNP,
t
s
a
c
e
r
o
f
e
h
t
together with
These targets,
as
deral Reserve h
e
F
e
h
t
h
c
i
h
w
unemployment
inflation, and
the Congress
d
e
d
i
v
o
r
p
e
v
a
h
,
ss since 1975
e
r
g
n
o
C
e
h
t
d
e
suppli
al
about the Feder
n
o
i
t
a
m
r
o
f
n
i
body of
with a useful
ry seasons have
a
t
e
n
o
m
m
l
a
c
tions, and in
Reserve's inten
of performance.
k
c
i
t
s
d
r
a
y
e
l
asonab
served as a re
er 1979 was
b
o
t
c
O
in
s
e
r
u
d
ce
targeting pro
The change in
ong-standing
l
a
d
e
t
c
e
r
r
o
c
ne, because it
o
e
l
b
i
s
n
e
s
a
also
clical changes
y
c
o
t
e
s
n
o
p
s
e
s r
eral Reserve'
d
e
F
e
h
t
in
t
c
defe
targeting,
te
ra
t
s
e
r
e
t
n
i
erm
Under short-t
.
y
m
o
n
o
c
e
e
in th
y to act proc
n
e
d
n
e
t
a
n
w
eserve had sho
the Federal R
o aggravate
s
d
n
a
n
w
o
d
s
ate
ld interest r
ho
o
t
y
l
l
a
cyclic
d, and to keep
n
a
m
e
d
h
g
i
h
of
res in times
u
s
s
e
r
p
y
r
a
n
o
inflati
in times of
y
r
e
v
o
c
e
r
d
r
a
t
up and so re
interest rates
rest
in theory, inte
,
g
n
i
t
e
g
r
a
t
der monetary
recession. Un
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-160-
ary booms, and to
rates would be allowed to rise in inflation
policy would
fall rapidly in recessions, and so monetary
r" to the arsenal of
contribute another "automatic stabilize
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
the system.
fiscal stabilizers already built into
can arise under
We now know, however, that conditions
not provide a good
which simple monetary targeting rules do
icy. In the case
guideline for the conduct of monetary pol
rise in the price of
of supply-side shocks, such as a sharp
monetary growth path
oil, rigid adherence to a preordained
o a fall of output and
transmits all of the shock rapidly int
regards the
employment, which is desirable only if one
ch we certainly do
unemployment rate with disinterest, whi
Report for 1961 as
not. Last year, we wrote in our Annual
follows:
ge of oil
Sudden supply shocks -- such as the sur
ticularly
prices in 1979 and 1980 -- can be a par
from the
damaging source of short-run deviation
dit. Such
target rates of growth of money and cre
se in the
shocks, if not accompanied by an increa
the economy
velocity of money, impose real costs on
pletely by
which cannot and should not be offset com
other way, and
monetary expansion. But to err the
rt-run money
to attempt to maintain too rigid a sho
ck (for
growth path in the face of an oil sho
rates, lost
example) could mean sky-high interest
reme is
output, and unemployment. Neither ext
partly
desirable. The Federal Reserve should
run, while
accommodate supply shocks in the short
credit growth
working toward control over money and
over time.
significant supply shocks
As it happened, there were no
in 1961.
to monetary policy and the economy
Nevertheless,
serious ramifications
other events did occur, with equally
for monetary policy procedures.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
was the introduction in
The most important such event
, the rapid growth of
1981 of nationwide NOW accounts
nds, and other forms of
fu
al
tu
mu
et
rk
ma
y
ne
mo
e
bl
ka
chec
ral Reserve responded to
de
Fe
e
Th
.
on
ti
va
no
in
l
ia
nc
fina
large additional surge of
a
d
te
ra
ne
ge
h
ic
wh
,
ts
en
ev
e
thes
flowed in from the higher
s
nd
fu
as
1
198
of
l
ri
Ap
in
M1B
-bearing checkable deposits,
st
re
te
in
to
es
at
eg
gr
ag
ry
ta
mone
publishing a "shift-adjusted"
d
an
s
ow
fl
ch
su
g
in
ct
ra
bt
by su
sted M1B assumed that 22.5
ju
ad
tif
sh
of
te
ma
ti
es
e
Th
M1B.
kable Deposits in January
ec
Ch
r
he
Ot
to
in
s
ow
fl
of
t
en
perc
months came from nondemand
nt
ue
eq
bs
su
in
t
en
rc
pe
.5
27
and
deposit sources.
n to the Federal Reserve's
We have no particular objectio
complaint with the estimate of
adjustment method, nor any
rely
deral Reserve derived. We me
shift-adjusted M1B the Fe
at
hift-adjusted" M1B represents
note that derivation of "s
ent
"best guess." And a differ
best an approximation -- a
ct on the estimate of
fe
ef
ic
at
am
dr
a
d
ha
ve
ha
estimate would
rgeting rule in effect,
ta
ry
ta
ne
mo
e
th
r
de
un
e,
M1B and, henc
t of monetary policy.
uc
nd
co
e
th
r
fo
ns
io
at
ic
pl
different im
under which the Federal
ts
is
ex
e
ur
ed
oc
pr
ic
at
em
Yet, no syst
such abrupt redefinitions
y
if
st
ju
d
an
on
rt
po
re
Reserve must
which it is operating.
of the monetary target on
nd has also emerged as a
Instability of money dema
nduct of monetary policy.
serious issue for the co
function can mean that a
nd
ma
de
y
ne
mo
e
th
of
Misestimation
the real economy which
on
s
ct
fe
ef
s
ha
et
rg
ta
given monetary
nsionary -- than the
pa
ex
re
mo
or
-e
iv
ct
are more restri
-162-
M
monetary authorities intend.
In recent years, such
misestimation has become common, and has been offered by
some as a phenomenon which partly explains how a change in
monetary policy procedures intended to be stabilizing can
have destabilizing consequences on output, employment, and
inflation.
A particularly important shift in money demand may occur
if the public adopts durable expectations of lower inflation
in the future.
In such a case, money demand may rise, as
individuals see the benefits of relative liquidity coming to
outweigh the declining opportunity cost of holding a noninterest bearing asset.
A monetary target which fails to
take into account this shift in expectations will prove to
be too restrictive in practice, driving up interest rates
and causing unemployment, when in fact no excess demand in
final goods markets exists.
There is no way at present to
foresee or measure such shifts in inflationary expectations.
Thus, to the extent the monetary authorities are operating
under a long-range schedule for deceleration of predefined
monetary aggregates, as the Administration has recommended,
the Nation is under a Damocletian sword of potential future
excess restraint.
In our last Annual Report, we argued that the Federal
Reserve's procedures for monetary control could be improved,
and the danger described above lessened, if the Federal
Reserve were to undertake a careful, public, annual exercise
of linking its targets for the monetary aggregates to the
-161
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Federal Reserve Bank of St. Louis
i
gets are set.
state of the economy at the time the tar
We
wrote:
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Federal Reserve Bank of St. Louis
targets
The Federal Reserve should calculate its
un
each year on the basis of its long-r
and on the
noninflationary money growth objective
technique
state of the economy. For example, a
ential growth
could be to begin by adding to the pot
lation rate
rate of real GNP some part of the inf
ng year
which cannot be avoided in the forthcomi
, the
(taken as the core rate of inflation
effects of
underlying trend of inflation when the
been taken
excess demand and supply shocks have
tract any
out). From that value, one could sub
ty of money.
expected rate of increase of the veloci
s option would
The benchmark value derived using thi
tes the
imply a monetary policy that accommoda
and the existing
economy's real growth potential
eral Reserve
core rate of inflation. If the Fed
more
believes that a more restrained or a
for, it should
stimulative policy would be called
so indicate, giving its reasons.
ake this exercise
The Federal Reserve should undert
reflect changes
annually, adjusting its targets to
core rate of
in our real growth potential, our
money -- i.e., in
inflation, and in the demand for
Federal Reserve
the income velocity of money. The
luence of changes
should explain to Congress the inf
targets which it is
in each of these factors on the
of the annual
presenting. Such careful linking
wth potential and
monetary targets to the real gro
the credibility of
to core inflation will increase
Reserve's antithe targets and of the Federal
help focus
inflationary policy, and it will
the Federal
attention on the long-run nature of
credit.
Reserve's objectives for money and
the Federal
In setting its monetary targets,
rt for changes in
Reserve should be especially ale
er the
the velocity of money. These alt
and nominal GNP,
relationship between money growth
en monetary target is
and so determine whether a giv
effect on the
restrictive or expansionary in its
reases, it is
economy. When money velocity inc
ranges in order to
appropriate to lower the target
restraint, and
maintain an equivalent degree of
ls.
conversely when money velocity fal
an exercise of
We continue to believe that such
ld help the Federal
wou
and
l,
pfu
hel
be
ld
wou
on
ati
explan
commitments to particular
Reserve to escape from dogmatic
-164-
sed.
h may be ill-advi
ic
wh
es
iv
ct
je
ob
arithmetical
t
this alone may no
at
th
d
de
ua
rs
pe
e now
Nevertheless, we ar
review
a fundamental
r
fo
se
ca
r
ea
cl
is a
be enough. There
its
cy formation and
li
po
ry
ta
ne
mo
ess of
of the entire proc
l
e that the Federa
ev
li
be
We
.
ss
ngre
oversight by the Co
es
report on the issu
d
an
y
ud
st
to
g
akin
Reserve, by undert
icantly to the
if
gn
si
te
bu
ri
nt
d co
listed above, coul
e
process and to th
cy
li
po
ry
ta
ne
mo
our
revitalization of
e
and support for th
of
y
it
il
ib
ed
cr
the
reestablishment of
stem.
Federal Reserve Sy
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
. 9:
Recommendation No
Is Not A Problem
ney Volatility
Mo
n
Ru
tor
Sh
ry
Ve
e view that very
We disagree with th
of money growth
ty
li
ti
la
vo
n
ru
81.
shortthe economy in 19
d
ge
ma
da
y
tl
an
ic
signif
ral
icism of the Fede
it
cr
is
th
at
th
urge
sed with.
Reserve be dispen
We
ulated repeatedly
ip
st
on
ti
ra
st
ni
Admi
In early 1981, the
of monetary policy
s
aw
fl
e
th
of
is
s analys
and extensively it
e
tary policy in th
ne
mo
r
fo
on
ti
ip
s prescr
in the past and it
growth in the past
y
ne
mo
n:
ai
pl
ysis was
future. The anal
uay
testified on Febr
n
ga
Re
y
ar
et
cr
As Se
had been too rapid.
19, 1981:
tes of money
ra
e
th
if
le
ib
ss
impo
Stable prices are
te of goods and
ra
th
ow
gr
e
th
re
growth exceed
on average for mo
ne
do
ve
ha
ey
th
services, as
than a decade.
ld be
money growth shou
n:
ai
pl
so
al
s
wa
The prescription
s.
er a period of year
ov
ly
nt
te
is
ns
co
d
slowed, slowly an
such qualifiers
ed
us
ly
nt
ue
eq
fr
nistration
Although the Admi
cy
be the monetary poli
ri
sc
de
to
t"
en
st
onsi
as "steady" and "c
e
these referred to th
at
th
r
ea
cl
it
made
they desired, they
ry
prescribing moneta
re
we
ey
th
h
ic
wh
for
multi-year period
e
th volatility in th
ow
gr
y
ne
mo
to
t
no
and
policy as a whole,
n
a colloquy betwee
in
d
ge
er
em
is
Th
n.
extremely short ru
February 19, 1981.
on
s
us
Re
an
rm
ai
d Ch
Secretary Regan an
om
on an inference fr
on
ti
es
qu
s
hi
d
base
Chairman Reuss had
ministration had
Ad
e
th
at
th
y
on
im
test
Secretary Regan's
serve for the
Re
l
ra
de
Fe
e
th
struction to
given a specific in
polcy in 1981:
ry
ta
ne
mo
of
t
uc
nd
co
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
you
simply asking, are
am
I
s:
us
Re
Representative
right in telling
is
on
ti
ra
st
ni
mi
y
sure that the Ad
ght to get the mone
ou
it
at
th
81
19
al
the Fed now in
growth rate (of re
e
th
t,
en
rc
pe
1
supply down to
edict...?
GNP) that you pr
at
t is suggesting th
en
id
es
Pr
e
Th
n:
Secretary Rega
rticular year. We
pa
is
th
t
no
s,
for the out year
rve any particular
se
Re
l
ra
de
Fe
e
have not told th
an independent
e
ar
ey
th
t;
no
d
target. We woul
suggesting was for
s
wa
t
en
id
es
Pr
e
e
body... What th
d the like -- wher
an
84
19
to
82
19
in
the out years,
ent real growth
rc
pe
5
to
4
ng
range.
we are projecti
should be in that
et
rg
ta
y
ne
mo
GNP, that the
there, is he now
en
Ev
s:
us
Re
is
Representative
admittedly, that
-82
19
r
fo
at
at
suggesting th
now to determine th
t
gh
ou
we
-f
tary
nine months of
esent rate of mone
pr
e
th
t
cu
to
we are going
to 4 percent?
6
om
fr
d,
ir
th
egrowth by on
ggesting -- we
su
is
he
at
Wh
No.
Secretary Regan:
We can't go
e.
er
th
g
in
go
ad
are on the ro
off like a faucet.
it
rn
tu
t
n'
ca
overnight. We
at is an ultimate
th
is
ng
ti
es
gg
What he is su
rget or even,
ta
e
ng
ra
tor
sh
an a
ngtarget, rather th
et. It is our lo
rg
ta
te
ia
ed
rm
te
esting should
gg
indeed, an in
su
is
t
en
id
es
the Pr
range goal that
se of action.
be the Fed's cour
came firmly to
on
ti
ra
st
ni
mi
Ad
e
, th
As 1981 progressed
terest rate policy
in
gh
hi
y,
ne
mo
e tight
the support of th
ril
l Reserve. On Ap
ra
de
Fe
e
th
by
effect
which was put into
-166-
ied
l Sprinkel testif
ry
Be
ry
ta
re
ec
Unders
6, 1961, Treasury
,
and Fiscal Policy
ry
ta
ne
Mo
on
ee
mitt
before the Subcom
tor Jepsen:
chaired by Sena
eartedly a long
eh
ol
wh
t
or
pp
su
d
dy,
...we applaud an
ll lead to a stea
wi
h
ic
wh
m
ra
og
term monetary pr
y slow rate of
el
at
ri
op
pr
ap
d
predictable, an
n...
monetary expansio
rve's
the Federal Rese
of
ve
ti
or
pp
su
the monetary
...we are
in
th
ow
gr
ce
du
re
15
stated intent to
sses of the past
ce
ex
ry
ta
ne
mo
e
deral
aggregates. Th
ickly and the Fe
qu
d
te
ec
rr
co
udent
years cannot be
for 1981 is a pr
n
io
nt
te
in
ed
Reserve's stat
first step.
tion of
address the ques
d
di
el
nk
ri
Sp
Undersecretary
ng:
aggregates, sayi
ry
ta
ne
mo
e
th
lity in
short-run volati
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
from
er money growth
ov
l
ro
nt
co
ct
ent
Obviously, stri
le given the curr to
ib
ss
po
t
no
is
y is
month to month
random variabilit
d
an
e,
ur
ct
ru
ic
financial st
r hand, systemat
he
ot
e
th
On
t for
.
be expected
th which persis
pa
et
rg
ta
e
th
deviations from
can be avoided.
several months
no grounds for
ed
id
ov
pr
d
ha
n
is criterio
Nevertheless, th
as the
to that point,
up
e
rv
se
Re
l
Federa
criticism of the
uy shows:
following colloq
ral Reserve
de
Fe
e
th
s
Ha
uss:
d
Representative Re
office) performe
in
en
be
ve
ha
u
(since yo
e concerned?
ar
u
yo
as
r
fa
as
satisfactorily
a
There has been
.
so
k
in
th
I
th since last
ow
Dr. Sprinkel:
gr
ry
ta
ne
mo
ing in
significant slow
fall.
May 1981, the
in
g
in
nn
gi
be
,
at followed
In the months th
d
narrowly define
e
th
of
th
ow
gr
brought the
Federal Reserve
th
ptly. M1B grow
ru
ab
d
an
y
pl
ar
B, dc,wn. sh
money stock, M1
ve; on a firstti
ga
ne
ly
al
tu
h October was ac
from May throug
-167-
growth rate for
al
nu
an
e
th
s,
si
uarter ba
quarter-to-third-q
.
ot up, and stayed up
sh
s
te
ra
st
re
te
In
M1B was 1.3 percent.
July.
recession, began in
p
ee
st
a
e,
nc
ue
The conseq
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
on
steady decelerati
l,
ua
ad
gr
a
r
fo
ce
Given the preferen
rly
which it had clea
s
ar
ye
of
od
ri
pe
er a
of money growth ov
tion would have
ra
st
ni
mi
Ad
e
th
Committee,
articulated to this
gust, September,
Au
,
ly
Ju
,
ne
Ju
ified in
been entirely just
serve for a too
Re
l
ra
de
Fe
e
th
g
iticizin
and October in cr
y
ackdown on the mone
cr
y
ar
ss
ce
ne
un
rapid, over-zealous,
,
On the contrary
.
so
do
t
no
d
di
stration
supply. The Admini
e
fore this Committe
be
g
in
ar
pe
ap
s
cial
Administration offi
tight money, high
e
th
ed
rs
do
en
nsistently
repeatedly and co
serve.
of the Federal Re
cy
li
po
te
ra
st
intere
um appeared at
ba
en
id
We
ay
rr
Mu
Chairman
On June 17, 1981,
uctivity, and
od
Pr
e,
ad
Tr
on
Subcommittee
a hearing of the
. His testimony
th
Ro
r
to
na
Se
by
chaired
Economic Growth,
Senator Abdnor:
th
wi
ge
an
ch
ex
g
owin
included the foll
productivity is
ng
si
ea
cr
In
:
or
s to
Senator Abdn
d I support effort rest
an
t,
an
rt
po
im
d
high inte
necessary an
growth, but with
ty
vi
ti
uc
od
pr
promote
not be effective.
ll
wi
s
rt
fo
ef
r
rates ou
understanding,
my
's
It
:
um
ba
en
ns
Chairman Weid
ationary expectatio tes.
fl
in
gh
hi
e
th
st ra
Senator, that
r the high intere
fo
or
ct
fa
g
in
iv
n,
are the dr
down the inflatio
g
in
br
to
ue
in
As we cont
have already seen
We
.
ll
fa
ld
ou
d
interest rates sh
ast a temporary an
le
at
of
gs
tes.
in
nn
the begi
ine in interest ra my
cl
de
rm
te
er
is
hopefully a long
recast, but it
fo
nt
oi
np
pi
a
u
I can't give yo
inues to unwind
nt
co
n
io
at
fl
in
as
al restraint we
expectation that,
sc
fi
d
an
ry
ta
ne
mo
-- because of the -- we will see inflation coming
on
have embarked up
th inflationary
wi
,
wn
do
me
co
to
in
down and continue
rther progress
fu
d
an
,
wn
do
ng
tes,
expectations comi
high interest ra
y
ll
fu
in
pa
e
os
bringing down th
ctive.
which is our obje
-168-
Jordan, a member of the
On September 24, 1961, Dr. Jerry
Advisers, testified before
President's Council of Economic
of
the Administration's support
d
rme
ffi
rea
and
tee
mit
Com
the
Federal Reserve policy:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
in your judgment, is
Representative Reuss: Where,
at the present
the Federal Reserve going astray
time?
y are going astray.
Dr. Jordan: I don't believe the
effect of relatively
...We think that the long-term
decline in both
slow monetary growth is going to
st rates, but we
short-term and long-term intere
st rates had to
were aware that short-term intere
ned that people might
decline first. We were concer
term interest rates as
misinterpret declining shortto fight against
being a caving -in on the will
e that that is the
inflation, and I don't believ
correct interpretation at all.
line the rest of
We expect interest rates to dec
r, but we don't think
this year and all of next yea
we are not as
that that should signal that
lation or that the
determined to fight against inf
g in its antiFederal Reserve is not persistin
inflation policies.
Weidenbaum testified before
On October 7, 1981, Chairman
Goals and Intergovernmental
the Subcommittee on Economic
Defense Buildup and the
Policy, at a hearing on "The
m had this
Chairman Reuss and Dr. Weidenbau
Economy."
exchange:
ure the
Chairman Weidenbaum: I can ass
our monetary and
Chairman...of the constancy of
, we have stated a
fiscal policy. From the outset
in the money supply
steady and slow rate of growth
inflationary pace of
in contrast to the excessive
ary objective of our
recent years is a very necess
e supported and
economic program, and we hav
l Reserve's efforts
continue to support the Federa
erate growth in the
to achieve that steady and mod
monetary aggregates.
s tempting to jump on
Representative Reuss: Now it'
is below their target and
the Fed and say their M1B
• • •
-169-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
efore,
up. Do you, ther
it
v
re
er
tt
be
they'd
think that the Fed
,
on
rs
pe
e
at
iv
speaking as a pr
M1B?
should now rev up
a member of the
as
ng
ki
ea
Sp
um:
Chairman Weidenba
e Fed should rev
th
k
in
th
t
n'
do
s
Administration, I
inue to follow it
nt
co
ld
ou
sh
d
Fe
the
up. I think the
restraint which is
ry
ta
ne
mo
of
et
announced policy
orted from the outs
pp
su
ly
di
ea
st
policy we have
am mindful of the
I
.
on
ti
ra
st
ni
ic
of this Admi
brating the specif
li
ca
so
in
es
difficulti
ry aggregates to
ta
ne
mo
s
ou
ri
va
e
movements of the
strongly support th
I
t
bu
s,
et
rg
achieve those ta
hed by the Fed.
targets establis
s, I
e specific number
th
an
th
t
an
rt
po
ll
But more im
policy that we wi
ng
yi
rl
de
un
e
th
think, is
we have so far this
as
,
ss
re
og
pr
ion by
continue to make
e rate of inflat of monetary
th
ng
ci
du
re
in
year,
consistent policy
,
dy
ea
st
a
g
in
follow
se, has been the
ur
co
of
,
at
th
ent going back to
restraint and
id
es
Pr
e
th
of
t
emen
consistent stat
ement in Chicago
at
st
gn
ai
mp
ca
e
per
his comprehensiv
February White Pa
e
th
h
ug
ro
th
r,
back in Septembe
ic and monetary
om
on
ec
r
ou
e
at
this
where we enunci
ugh statements to
ro
th
ng
ui
in
nt
policy, and co
very day.
ctor of the
re
Di
,
an
km
oc
St
1981, David
On October 28,
d before the
ie
if
st
te
,
et
dg
ment and Bu
Office of Manage
licy, cliaired by
Po
al
sc
Fi
d
an
Monetary
Subcommittee on
ed "Government
tl
ti
en
g
in
ar
he
at a
Senator Jepsen,
to a question
se
on
sp
re
In
Small Business."
Competition with
or Stockman said:
ct
re
Di
s,
us
Re
from Chairman
been
months M1B has
l
ra
ve
se
st
la
to me,
...yes, in the
rate. It seems
w
lo
ry
rts
ve
a
the great expe
coming in at
of
e
on
en
be
e
o have
(would) recogniz
(that) you, wh
s,
ar
ye
ny
ma
,
ny
ma
in Congress for
d innovation
an
ge
an
ch
us
mo
or
a
that with the en financial markets today that
B, especially
M1
occurring in the
of
,
le
ab
ri
money va
deposit
measure of one
in financial
s
ge
an
ch
by
a few months
being affected
or
s
ek
we
w
fe
ly a
practices for on
story.
ll the whole
te
ly
al
re
t
n'
does
valid measure of
a
l
il
st
is
at M1B
the
If you assume th
ion deposits in ok at a
ct
sa
an
tr
ll
ca
lo
what we would
suggest that we
t
as
le
at
d
ul
ten months. In
economy, I wo
or
ne
ni
st
la
t the
year or at leas
-170-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
has been about 5 percent
that case, the growth rate
, and I think not
which is geared to the target
unduly low.
ther than an excuse for
So what we see is that, ra
cy, instead, the monetary
changing the monetary poli
ion is coming down. The
policy is working. Inflat
ing squeezed out of the
inflationary pressure is be
the burden of these
ce
du
re
to
t
wan
we
If
y.
econom
rest rates on small
currently prohibitive inte
ness for that matter, it
business and all other busi
to do is not quarrel with
seems to me what we ought
is correct, but address
the monetary policy which
tly responsible for,
in
jo
e
ar
we
ch
whi
m
le
ob
pr
the
licy, the budget, and the
po
al
sc
fi
e
th
is
at
th
d
an
way we can devise to get
deficit, and work in every
irement reduced.
the Treasury borrowing requ
• • •
official to appear before
on
ti
ra
st
ni
mi
Ad
or
ni
se
xt
The ne
Secretary Donald Regan, who
ry
su
ea
Tr
s
wa
e
te
it
mm
Co
the
at time, the depth and
th
By
.
82
19
,
27
y
ar
nu
Ja
testified on
tter known: unemployment
be
e
wer
n
io
ss
ce
re
e
th
of
severity
ter
r, November, and December af
be
to
Oc
in
y
pl
ar
sh
en
ris
had
and
le through the early fall,
having been relatively stab
r of 1981 had fallen at an
te
ar
qu
th
ur
fo
the
in
ut
tp
real ou
t. Somewhat paradoxically,
annual rate of over 5 percen
a
ply at the end of the year,
demand for money rose shar
explained by a drop in
ly
rt
pa
be
may
h
ic
wh
on
en
phenom
demand
generates a distress-based
ch
whi
s,
it
of
pr
e
at
or
rp
co
flow. This demand had been
for credit to provide cash
mmodated by the Federal
co
ac
ly
rt
pa
d
an
ed
st
si
re
partly
h had
e that interest rates, whic
nc
ue
eq
ns
co
e
th
h
wit
e,
rv
se
Re
turned around sharply
,
er
mb
ve
No
y
rl
ea
d
an
r
be
fallen in Octo
nth, while at the same time, mo
and starteci again to rise
sumed.
over -month growth of M1B re
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
almost
Most important, by late January, it was
ion was uniquely the
universally agreed that the recess
high interest rate policy
consequence of the tight money and
h Administration support,
pursued by the Federal Reserve, wit
January 19, 1982, three
consistently throughout 1981. On
testified before the
Nobel Laureates in Economic Science
damental point. Professor
Committee. All agreed on this fun
wassily Leontief testified:
Administration
Following Mrs. Thatcher's lead, the
beating the
is trying to suppress inflation by
re is an old
entire economy into the ground. The
meagre living by
joke about a gypsy who eked out a
he owned. One
renting out the services of a horse
profitability of
day, he decided to increase the
old nag gradually,
this enterprise by training the
r and smaller
step by step, to get by on smalle
weeks -- I should
rations of oats. For a couple of
seemed to be
say for a year now -- the policy
poor chap's
succeeding very well until, to the
died.
great surprise, the horse suddenly
Professor James Tobin testified:
the ship these
The money navigators are piloting
1981, the Federal
days. After all the rhetoric of
program is the
Government's only anti-inflation
d, the same old
same as Mrs. Thatcher's in Englan
ations have
remedy that previous Administr
depress monetary
intermittently tried. This is to
let competition
spending for goods and services and loyers
emp
of workers desperate for jobs and and price
e
desperate for customers lower wag
and his three
gan
inflation rates. President Rea
unemployment as a
predecessors all swore not to use
of them has done
remedy for inflation. Every one
ulties.
so, and encountered the same diffic
ied:
Professor Lawrence Klein testif
(in early 1961)
The general economic environment
in a positive
wo,s extremely favorable and moving
the management of
direction. what went wrong with
economy into a renewed
economic policy to throw the
following the
recession after just one year,
-172-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
int? A combination of
previous upper turning po
authorities in pursuing
overreaction by monetary
and serious
policies of tight credit,
ying fiscal policies by
an
mp
co
ac
of
on
ti
la
cu
al
misc
a complete breakdown of
the Administration led to
nancial markets. The
credibility vis-a-vis fi
t back home buying,
se
s
te
ra
st
re
te
in
gh
hi
unusually
credit -based
car purchasing, and other
aggregate demand was
l,
ra
ne
ge
In
.
es
ur
it
nd
expe
nfidence in national
weakened by a loss of co
economic policy.
, 1982, the Committee
20
y
ar
nu
Ja
y,
da
g
in
ow
ll
On the fo
onomic analysts and
ec
d
te
ec
sp
re
l
ra
ve
se
om
fr
heard
forecasters.
d:
Dr. Barry Bosworth testifie
icularly the Federal
rt
pa
d
an
,
nt
me
rn
ve
go
...the
t a hard-line policy of
op
ad
to
d
de
ci
de
d
ha
e,
Reserv
ary means of fighting
im
pr
a
as
t
in
ra
st
re
nd
dema
e of this decision is
nc
ue
eq
ns
co
e
On
n.
io
at
fl
in
e
t an accident: it was th
that this recession is no
s,
result of policy decision
conscious and predicted
ed as such.
and it should be analyz
Dr. Allen Sinai testified:
believe, came from a very
The 1981 recession, I
policy...
tough and tight monetary
d:
Dr. Michael Evans testifie
s
cause of the recession wa
e
at
im
ox
pr
e
th
k
in
th
...I
s.
cy and high interest rate
li
po
ry
ta
ne
mo
t
gh
ti
e
th
the Committee heard
,
82
19
,
26
y
ar
nu
Ja
on
Finally,
l
A. Volcker of the Federa
ul
Pa
an
rm
ai
Ch
om
fr
y
on
testim
th Senator Sarbanes:
wi
ge
an
ch
ex
is
th
d
ha
Reserve Board. He
rman Volcker, would you
Senator Sarbanes: Chai
tes have contributed
ra
st
re
te
in
gh
hi
e
th
agree that
omy and the turndown in
on
ec
e
th
in
wn
do
ow
sl
to the
economc activity?
-173-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
look at it in the
u
yo
if
s,
Ye
r:
ke
Chairman Volc
nse, yes.
narrow, immediate se
e, as
before the Committe
ed
ar
pe
ap
n
ga
Re
y
ar
Secret
. His testimony
82
19
,
27
y
ar
nu
Ja
previously noted, on
ed
1981, and thus depart
of
y
or
st
hi
ic
om
rewrote the econ
the
on's past support of
ti
ra
st
ni
mi
Ad
e
th
sharply from
tee. It did so by
it
mm
Co
is
th
re
fo
be
Federal Reserve
eviously
m, which had never pr
is
ic
it
cr
l
ve
no
a
introducing
al.
Administration offici
y
an
by
us
to
d
ne
been mentio
and repeated the
ed
dg
le
ow
kn
ac
n
ga
Re
Secretary
ated support for a
st
n
te
of
d
an
l
ra
ne
Administration's ge
of money growth:
gradual reduction
program included
ic
om
on
ec
al
in
ig
The President's or
owth be gradually
gr
y
ne
mo
at
th
on
past
the recommendati
pace. During the
y
ar
on
ti
la
nf
ni
no
ss
reduced to a
significant progre
de
ma
e
rv
se
Re
l
ra
year, the Fede
toward that goal.
ecisely,
sstated -- more pr
mi
en
th
y
ar
et
cr
But the Se
d
ney growth which ha
mo
in
n
io
ct
du
re
sharp
understated -- the
support in 1981,
's
on
ti
ra
st
ni
mi
Ad
e
taken place with th
years.
relative to previous
M1B grew slightly
r,
te
ar
qu
th
ur
fo
Fourth quarter to
mpared to the
Co
.
81
19
in
t
en
less than 5 perc
expansion in the
ry
ta
ne
mo
of
s
te
erage
inflationary ra
and an annual av
80
19
in
t
en
rc
pe
-- this
past -- 7.3
eding three years
ec
pr
e
th
in
t
en
th.
of 8.0 perc
tion in money grow
ra
le
ce
de
l
ia
nt
ta
is a subs
B
nonshift-adjusted M1
81
19
t
en
rc
pe
5
The comparison of
80 is invalid, and
19
of
th
ow
gr
t
3 percen
growth with the 7.
less
of M1B in 1981 was
on
ti
ra
le
ce
de
e
suggests that th
arison is
s. The proper comp
wa
ct
fa
in
it
severe than
-174-
rate of M1B in 1981, which
between the shift-adjusted growth
cent growth of the previous
was 2.2 percent, and the 7.3 per
adjusted figure can also be
year. That 2.2 percent shiftof 3.5 percent to 6.0 percent
et
rg
ta
M1B
the
h
wit
d
ste
contra
1981;
Reserve at the beginning of
l
ra
de
Fe
the
by
d
ate
pul
sti
of 5 percent must be viewed
the nonshift-adjusted figure
usted upward, to 6.0 to
adj
is
ch
whi
ge
ran
get
tar
a
against
ed at the back of Secretary
vid
pro
t
ar
ch
a
as
t,
cen
per
5
8.
uced here as Chart II-1,
Regan's testimony, and reprod
acknowledges.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
CHART II -1
A,
Mi VERSUS TARGET RANGE*
$Bil.
8.5%
450
5.51)/0
7"
4alto to 40'81 .
6.0°/0
2.5%
440
40'81 lo 40'82
430
420
it tit tii
111111111111111111
111
i
tit
tti
iti
hit
tit
til
tit
ili
410 iil
ASONDJFM
NDJFMAMJJ
1982
1981
1980
*
Weekly Averages - Seasonally Adjusted
adjusted)
+(Editor's Note: M1B, not shift-
ald T. Regan
Source: Testimony of Secretary Don
27,o 1982
Joint Economic Committee, January
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Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The importance of Secretary Regan's misrepresentation of
M1B growth as having been 5 percent in 1981 emerges in his
testimony a few paragraphs later:
...we supported money growth in the middle of the
Federal Reserve's target range in 1981.
The intended logic is simple.
If money growth was intended
by the Federal Reserve to be 3.5 to 6.0 percent, and if the
Administration had had a clear policy of supporting growth
in the middle of that range, and if such growth was
achieved, how can tight money as such be held responsible
for the unexpected recession?
In fact, M1B growth, however measured, fell far below
the bottom of the Federal Reserve's target range.
And, as
demonstrated above, the Administration had continued
consistently to support Federal Reserve policy through the
summer and fall even though that policy was leading to M1B
growth well below the bottom of the target range.
Next, Secretary Regan launched an entirely new line of
of
criticism against the Federal Reserve, drawn from a form
fringe monetarism whose ideas the Administration had never
previously endorsed.
The effect was to develop an entirely
new explanation for the recession. Secretary Regan's
comments are reproduced here:
The erratic pattern of money growth that occurred
in 1980 and 1981 and which contributed to the onset
of the current downturn. At various times during
the year, we at Treasury have hinted, sometimes in
private, sometimes in public, that we would like
either faster or slower money growth. Some have
accused us of being unable to make up our minds.
-177-
have
from the truth. We
r
he
rt
fu
be
d
ul
co
e
Nothing
money growth when th
er
st
fa
d
ge
ur
ly
nt
er
consiste
declining, and slow
or
at
fl
s
wa
ly
pp
at
money su
ney supply was rising
mo
e
th
en
wh
th
ow
gr
l
money
supported the Federa
We
s.
te
ra
it
ig
em to
double-d
nsistently urged th
co
d
an
s,
et
rg
ta
s
Reserve'
within the target
dy
ea
st
d
an
en
ev
keep money growth
range.
M1B fell at an
,
80
19
of
hs
nt
mo
In the last three
, after a sharp
ar
ye
r
pe
t
en
rc
pe
annual rate of 1
Virtually all of
.
hs
nt
mo
ve
fi
us
t
rise in the previo
occurred in the firs
81
19
in
B
M1
in
th
13.3
the grow
, when it grew at a
ar
ye
e
th
of
hs
nt
four mo
two months of the
st
la
e
th
d
an
,
te
percent annual ra
.0 percent rate.
13
a
at
s
wa
th
ow
year, when M1B gr
om week to week.
fr
ed
at
ll
ci
os
B
In the interim, M1
October, the net
to
l
ri
Ap
om
fr
Such
In the six months
of 0.1 percent.
se
ea
cr
de
a
s
wa
change
maging effects on
da
ry
ve
s
ha
th
ow
volatile money gr
credibility of long
e
th
ys
ro
st
de
the economy. It
certainty and
un
to
ds
ad
,
ls
ro
run monetary cont
terest rates high as
in
ep
ke
s
lp
he
y
risk, and thereb
t their principal.
ec
ot
pr
to
ek
se
s
lender
kept financial
s
ha
n
er
tt
pa
c
This very errati
for some time.
ay
rr
sa
di
of
e
at
markets in a st
tion's position
ra
st
ni
mi
Ad
e
th
on of
As a characterizati
ragraphs of this
pa
o
tw
t
rs
fi
e
th
in 1981,
on monetary policy
testimony before
of
rd
co
re
e
Th
eading.
quotation are misl
Administration had
e
th
at
th
s
te
ca
rly indi
this Committee clea
the variability
of
m
is
ic
it
cr
al
rd of form
offered not one wo
testimony. As late
s
n'
ga
Re
y
ar
et
til Secr
of money growth un
an
d Director Stockm
an
um
ba
en
id
We
Chairman
as October, both
ge
e against the char
rv
se
Re
l
ra
de
Fe
ed the
specifically defend
ggestion that it
su
e
th
d
an
w
lo
was too
that money growth
target ranges.
s
it
in
th
wi
ck
ba
should be brought
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
cretary Regan
Se
by
d
le
ve
le
ntive charge
As for the substa
character is
us
uo
en
ng
si
di
s
serve, it
at the Federal Re
saying that week w
no
is
on
ti
ra
st
Admini
breathtaking. The
not its low level,
d
an
,
th
ow
gr
ty of money
to-week volatili
-178-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
s.
is responsible for the high level of interest rate
In so
h they
doing, they exonerate tight monetary policy, whic
from
continue to support, and therefore themselves,
responsibility for the recession.
And yet this new exercise
Reserve!
leaves the blame for the recession with the Federal
to
The complete failure of any Administration official
y growth
criticize the Federal Reserve for short-run mone
arances
volatility at any time in any of their numerous appe
in 1981
to discuss monetary policy before this Committee
being offered.
poses a problem for the line of criticism now
ctor
The last such appearance, as noted above, was by Dire
Stockman on October 28, 1981.
At that time, of course,
tility of
every fact cited by Secretary Regan about the vola
1981 was
money growth from October 1980 through mid-October
already known, and yet no criticism was offered.
One must,
policies
therefore, conclude that, with respect to monetary
changed
up to October 1981, the Administration conveniently
theories after the fact.
Such a change cannot, of course,
lessen the Administration's responsibility for the
d at
consequences of a monetary policy which they supporte
least until the end of October.
We believe the Administration cannot evade the simple
facts of 1981, which are that tight money caused the
tight
recession, and that the Administration supported the
money policy up and down the line.
10:
Recommendation No.
dard
Reject the Gold Stan
rn to the gold
All forms of a retu
ed by the President,
ct
je
re
be
ld
ou
sh
standard
, and the Congress.
the Administration
e
ry policy and of th
Discussion of moneta
ddied in 1981 by a
mu
s
wa
es
ci
li
po
onomic
Administration's ec
g to some form of
in
rn
tu
re
in
st
re
inte
flurry of contrived
pporters of the
su
n
ai
rt
Ce
.
rd
da
the gold stan
who had earlier
me
so
g
in
ud
cl
in
m,
ogra
Administration's pr
ic
ninflationary econom
no
e
at
di
me
im
an
of
been most confident
rest rates had
te
in
gh
hi
r
te
af
y,
sa
boom, were heard to
ly a gold standard
on
at
th
,
sm
mi
ti
op
negated their early
the
ns enough to permit
io
at
ct
pe
ex
ry
na
io
could lower inflat
Gold
The United States
.
rk
wo
to
m
ra
og
Pr
Economic Recovery
ive
part of a legislat
as
80
19
in
d
he
is
Commission, establ
recent IMF quota
st
mo
e
th
d
te
it
rm
compromise which pe
te summer and
la
in
d
te
tu
ti
ns
co
rward, was
extensions to go fo
statutory duty
e
th
th
wi
,
er
nt
wi
fall and
met throughout the
ry
and future moneta
t
en
es
pr
e
th
on
rt
po
to evaluate and re
role of gold.
irmed the obvious:
nf
co
on
si
is
mm
Co
Gold
The record of the
andard have put
st
ld
go
e
th
to
a return
that supporters of
tention. The
at
r
he
rt
fu
ts
ri
which me
forward no proposal
revealed to be a
re
we
rn
tu
re
a
supporters of such
conceptions of
al
ic
or
st
hi
g
in
er
ff
p with di
heterogeneous grou
reform proposals
th
wi
d
an
s,
wa
rd
da
what the gold stan
ll
gold coins to fu
of
g
in
nt
mi
ee
fr
ranging from
disguised money
ly
ht
ig
sl
a
to
n
gold bullio
convertibility of
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-180-
.
In every case, these proposals were found to
growth rule.
be deficient.
Moreover, even if the obstacles of
practicality could be overcome, there is simply no evidence
that a return to any form of the gold standard would
contribute in the slightest to the goals of high employment,
rapid growth, or stable prices.
The gold standard's supporters have had their day in the
limelight.
The Administration and the Congress should
dismiss any further efforts to keep this issue alive.
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Federal Reserve Bank of St. Louis
-181-
.41
'of GO vt•••
BOARD OF GOVERNORS
OF THE
•
••
•• 8;re4,73
FEDERAL RESERVE SYSTEM
r•r r.
4;1 it•u •
3;1;.•
••elt4i—RESt" ••
WASHINGTON, D. C. 20SSI
March 17, 1982
PAUL A. VOLCKER
CHAIRMAN
The Honorable William Proxmire
United States Senate
20510
Washington, D.C.
Dear Senator Proxmire:
Thank you for your letter of March 9, requesting
comment relating to legislation proposed by Senator Lugar
that would subsidize the interest rate nn mnrtgage loans for
new homes. You have asked whether the Federal Reserve would
accommodate additionl credit demands expected to be generated
by the program and thereby keep interest rates from rising.
You have also inquired whether interest rates would rise without such accommodation, tending to choke off growth in other
sectors.
As you know, the Federal Reserve sets annual target
ranges for growth of the monetary aggregates and bank credit.
The growth targets for 1982--announced to the Congress in the
Board's February report pursuant to the Full Employment anri
Balanred Growth Act of 1978--were designed to be consistent
with recovery in economic activity accompanied by continued
moderation of inflation.
In general terms, specific changes in those targets
or the provision of reserves to the banking system simply to
"accommodate" particular budgetary or other legislative initiatives that might increase governmental or other credit would
be inappropriate in terms of our goals and would impair confidence in our ability to reach those goals. If the result
would be to contribute to greater concern about inflation, the
action would be counterproductive in relation to the objective
of lower interest rates.
Our monetary and credit targets are, of course,
under continuing review. Changes would be appropriate only
aggreif the evidence about the relationship between those
on
gates and the basic objectives of progress against inflati
While a
and economic growth strongly suggested such action.
change the
Federally-subsidized mortgage program would tend to
itself be
distribution of available credit, it would not in
priate.
evidence that existing monetary policies are inappro
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
k
re
The Honorable William Proxmi
Page Two
of increased federal
The effect on interest rates
to private credit demands
us
mul
sti
any
and
g,
sin
hou
outlays for
depends in no small part on the
such outlays might generate,
picture. Prospective huge
overall federal budget deficit
absence of strong and early
deficits in coming years--in the
as you know, a major influence
action by the Congress--are,
ctively. If appropriate
spe
pro
and
tly
ren
cur
s
ket
mar
on credit
overall fiscal outlook,
the
to
ard
reg
h
wit
en
tak
t
no
action is
es and financial markets will
then pressures on interest rat
with consequent damage to
remain greater than otherwise,
Under these circumstances,
.
wth
gro
and
ry
ove
rec
for
prospects
federal programs to channel
new
t
tha
sed
rea
inc
are
s
the chance
to
to any one sector will add
credit and economic activity
.
choke off activity elsewhere
financial market pressures and
l depend on their sensitivity
The impact on other sectors wil
under those circumstances,
to higher interest rates. But,
m are likely to come at the
jobs generated by the new progra
nonsubsidized parts of the
expense of jobs lost in other,
ued that the effect would not
economy. While it might be arg
any event, could not be
be a ore-for-one offset and, in
eading financial strain
spr
of
ks
ris
the
d,
fie
nti
precisely ide
nomy generally are real.
with adverse effects on the eco
ss that high interest
I am well aware of the distre
sector, its suppliers, and
g
sin
hou
the
on
ng
osi
imp
rates are
l with the problem by
dea
to
ts
emp
att
r,
eve
How
homebuyers.
the expense of a sense
at
wth
gro
ey
mon
ive
ess
exc
encouraging
ss has become so visible,
gre
pro
as
t
jus
ion
lat
inf
on
of retreat
my judgment, the greatest
In
ng.
ati
efe
f-d
sel
be
y
would clearl
e at present to resolving
mak
can
t
men
ern
gov
the
contribution
ing the housing industry,
ist
ass
and
m,
ble
pro
e
rat
the interest
ts,
with the prospective defici
would be to deal effectively
market implications,
ial
anc
fin
ect
dir
the
m
fro
which, apart
regarding government's
ty
ain
ert
unc
to
y
ril
ssa
ece
contribute unn
resolve to reduce inflation.
governmental subsidies to
of
on
sti
que
the
e
iev
bel
I
impact on credit markets,
ial
ent
pot
its
and
,
tor
sec
a particular
perspective. In other
r
ade
bro
t
tha
in
ed
ess
needs to be ass
h is whether new prowit
lt
dea
be
to
on
sti
que
words, a major
sening the total impact of
grams are consistent with les
government on credit markets.
be helpful. Please let
l
wil
ts
men
com
my
t
tha
e
I hop
ther assistance.
me know if I can be of fur
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Sincerely,
Sgaul A. VPickei
•
•
.nt
JAKE SARK UTAK CHAI11114AN
JOHN TOWETt TEX.
JOPIN HE!NZ, PA.
A it P.4 STRONG C.OLO.
W I ....... tA M
RICHARD G. LJJGAR. IND.
ALFONSE M D AMATO. N.Y.
JOHN 04 CNA FE E R.I.
KARR I SON &CH m ITT. N. M EX.
HARRISON A. WILLIAMS. J111,
WILLIAm Pw0XMIRE. WIS.
ALAN CR AN STON CALI F.
,M
DONA1-D W. RIEGLE. JR
PAUL S. BAR SANE S. M D.
CH R I STOPH E R J. DODO. CONN.
&LAN J.
x ON, ILL.
M DANNY WALL, STAFF DI R ECTOR
HOWARD A. IA EJ4ELL M I NOR I TY STAFF DI R ECTOR AND COUNSEL
?jrtifeb -Slates Zenale
COMMITTEE ON BANKING. HOUSING. AND
URBAN AFFAIRS
WASHINGTON. D.C. 20510
March 9, 1982
Tn
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The Honorable Paul Volcker
Chairman
Federal Reserve Board
20th and C Streets, N.W.
Washington, D.C. 20551
r•
55
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Dear Mr. Chairman:
e the interest
Senator Lugar has proposed legislation to subsidiz
number of housing
rate on home mortgage loans in order to increase the
units to be built.
mortgage to the
The program would reduce the interest rate on the
pture provision in the
borrower by four percentage points, and has a reca t $5 billion spread
abou
future. The total cost of the subsidy could be
ease in employment of
over five years. The proposal projects an incr
, and projects an in791,000 in construction and related housing jobs gages of $65,000 each.
mort
crease of about 400,000 units with subsidized
ion impact on the
The program will, therefore, have a $26 bill
your judgment, the Fed would
credit markets. The question is whether, in
the market to keep interest
accommodate this additional credit demand on
not make any accommodation.
rates from rising, or whether the Fed would
ion demand would have to
With no accommodation, the additional $26 bill
demands. If that were the case,
compete in the market with all other fund
in other sectors? Would the
would interest rates rise, choking off growth
about at the expense of
additional jobs created by the proposal come ors?
sect
others losing jobs in other unsubsidized
is in dire circumstanAs you can appreciate, the housing industry
small business, in general.
ces, as is farming, the auto industry, and proposal are crucial to a
Your answers to the questions raised by the tions of the proposal.
ramifica
complete understanding of all of the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Sincere,ly,
11 fan r
WP/lmh
m
••• • •
•
•• () GC)VE ••
BOARD OF GOVERNORS
OF THE
,f` ••
•co
FEDERAL RESERVE SYSTEM
•C
•
i•-• •
kn •
.
‘)
•
•
<• -‘
et•
•fRALREs.
••
WASHINGTON, D. E. 20E51
March 17, 1982
PAUL A. VOLCKER
CHAIRMAN
• • •.
The Honorable Wes Watkins
House of Representatives
20515
Washington, D.C.
Dear Mr. Watkins:
Thank you for your letter of March 3, in which you
ittee to
urge the Depository Institutions Deregulation Comm
liquid inadopt a deregulatory schedule and to authorize a
to compete
strument that would help depository institutions
more effectively with money market mutual funds.
ress
As you know, the Committee has been charged by Cong
sit interest
with an inherently difficult task--to phase out depo
savers while
rate ceilings in order to increase the return to
ent difficult
at the same time taking into consideration the curr
inently,
situation of depository institutions, including, prom
recent
many thrift institutions. At the Committee's most
pone conmeeting on December 16, a decision was made to post
the Committee's
sideration of further deregulatory actions until
sion in part
next meeting on March 22. I joined in that deci
agenda might
because some of the deregulatory proposals on the
her earnings
have placed many thrift institutions under furt
pressures at a very inopportune time.
tory
The Committee will reconsider various deregula
be inappropriate
proposals at its meeting next week. It would
t reach at that
to comment on what decisions the Committee migh
time goes on
meeting. It should be noted, however, that as
Congress and
the Committee's deregulatory mandate from the
ry institutions
the likely competitive position of all deposito
instruments
vis-a-vis money market funds and other market
deregulatory
will require continued consideration of further
actions.
DIDC
Let me assure you that, in consultation with
Committee, I will
Chairman Regan and the other members of the
osals for
give serious consideration to the various prop
deregulatory action at the upcoming meeting.
Sincerely,
NB:pjt (3 #V-51)
bcc: Mr. Bernard
Mrs. Mallardi
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Federal Reserve Bank of St. Louis
Action assignei Mr. Bernar-I
COMMITTEE ON
APPROPRIATIONS
WES WA,T,KINS
3o DIFTRICT, OKLAHOMA
*102) 225-4565
CONGRESS OF THE UNITED STATES
CHAIRMAN
CONGRESSIONAL RURAL
CAUCUS
HOUSE OF REPRESENTATIVES
WASHINGTON, D.C. 20515
March 3, 1982
CID
1\J
-r—
:=3
:7 3
Mr. Paul A . Volker
Chairman
Federal Reserve
20th & Constitution
Washington , D . C. 20551
co
Dear Mr. Vol ker:
I n your role as a member of the Depository Institutions Deregulation
Committee (DI DC), you have the opportunity to play a very vital role
in the implementation of the Deregulation and Monetary Control Act of
1980. As you know, that piece of legislation stands as a landmark in
the financial institution deregulation effort.
With the passage of that legislation , thrift institutions were granted
new powers and an agreement was reached that Regulation "Q" and the
interest rate differential would be phased out over a five-year period .
Since the D I DC has not formalized a deregulation schedule spelling out
precisely when rate ceilings would be removed from various maturities,
the nation's financial institutions are operating in a state of limbo.
The D I DC is next scheduled to meet March 22, to my understanding .
I would li ke to encourage you to procede at that time to formalize a
financial institutions deregulation schedule, and further, to grant
immediate authorization for banks and savings and loan institutions to
offer liquid market rate transaction accounts. The latter is, of course,
needed to allow depository institutions to compete with money market
funds.
Further delay in formalizing a deregulation schedule is unwarranted
therefore, I encourage positive DI DC action on March 22.
Sincerely,
Member of Congress
WW/ekr
OKLAHOMA DISTRICT OFFICES:
2A3 POST OFFICE BUILDING
DuricAN, OKLAHOMA 73533
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Federal Reserve Bank of St. Louis
(405) 252-1434
232 POST OFFICE BUILDING
ADA, OKLAHOMA 74820
(405) 436-1980
11 B FEDERAL BUILDING
MCALESTER, OKLAHOMA 74501
(918) 423-5951
vir
BOARD OF- GOVERNORS
OF THE
• co
.
•0
• -n
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
• 4./ZAL RE-S"
" • •..• •
March 17, 1982
PAUL A. VOLCKER
CHAIRMAN
The Honorable Billy Tauzin
House of Representatives
20515
Washington, D.C.
Dear Mr. Tauzin:
Thank you for your letter of March 5, in which you
communicated the concerns of your constituents in the Louisiana
banking community regarding deregulatory action by the Depository Institutions Deregulation Committee. You urge the
Committee to adopt a deregulatory schedule and to authorize
a liquid instrument that would help depository institutions
to compete more effectively with money market mutual funds.
As you know, the Committee has been charged by Congress
with an inherently difficult task--to phase out deposit interest
rate ceilings in order to increase the return to savers while
at the same time taking into consideration the current difficult situation of depository institutions, including, prominently,
many thrift institutions. At the Committee's most recent meeting
on December 16, a decision was made to postpone consideration
of further deregulatory actions until the Committee's next
meeting on March 22. I joined in that decision in part because
some of the deregulatory proposals on the agenda might have
placed 'many thrift institutions under further earnings pressures
at a very inopportune time.
The Committee will reconsider various deregulatory
proposals at its meeting next week. It would be inappropriate
to comment on what decisions the Committee might reach at
that meeting. It should be noted, however, that as time goes
on the Committee's deregulatory mandate from the Congress and
the likely competitive position of all depository institutions
vis-a-vis money market funds and other market instruments will
require continued consideration of further deregulatory actions.
Let me assure you that, in consultation with DIDC
Chairman Regan and the other members of the Committee, I will
give serious consideration to the various proposals for deregulatory action at the upcoming meeting.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Sincerely,
NB:pjt (#V-62)
bcc: Mr. Bernard
Mrs. Mallardi (2)
Action assigne4 Mr. Berna r4
BILLYTAUZIN
DISTRICT OFFICES:
THIRD DISTRICT, LOUISIANA
EAST:
ENERGY AND COMMERCE COMMITTEE
MERCHANT MARINE AND FISHERIES COMMITTEE
STEERING AND PCLICY COMMITTEE
TELEPHONE: 504-889-2303
Congre55 of tbe Uniteb -71)tateii
WASHINGTON OFFICE:
31)oute of ikepriCSentatibeS
TELEN-IoNE:2o2-2n-Ani
222 CANNON HOUSE OFFICE BUILDING
WASHINGTON, D.C.
4900 VETERANS MEMORIAL BOULEVARD
METAIRIE, LOUISIANA 70002
CENTRAL:
ELEPHONE. 504-876-3033
FEDERAL BUILDING. SUITE 107
HOUMA, LouisIANA 70360
liaastington, Z.C. 20515
20515
WEST:
TELEPHONE. 318-367-8231
WALLACE J. HENDERSON
ADMINISTRATIVE ASSISTANT
March 5, 1982
210 EAST MAIN STREET
NEW IBERIA, LOUISIANA
Honorable Paul A. Volcker
Chairman
Depository Institutions Deregulation Committee
20th and Constitution Avenue
Room B2120
Washington, D. C. 20551
4.0
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I write on behalf of my constituents who are member gM
of the Louisiana banking community.
ta,)
They have expressed to me their growing and legitimate
concerns about current regulations which restrict banks from
competing in a free market and, in effect, cause a substantial
loss of deposits to money market mutual funds and other
unregulated intermediaries.
As a result, money is being
drained from local communities where it would have been
invested in housing and other consumer goods.
Therefore, I urge the Depository Institutions Degrgulation
Committee to carry out the mandate given them by Congress by
taking action to approve a firm schedule for the phase-out
of Regulation Q and to authorize a short-term, ceiling free
instrument which will allow the regulated banking industry
to compete with money market funds and other unregulated
financial intermediaries.
The recent announcement that Sears plans to become
America's major supplier of financial services and the
interest of other parties in entering the financial industry
make it necessary that the DIDC take action at its scheduled
March 22 meeting on these measures to give banks the tools
with which to compete.
Your most careful consideration of this request will
be greatly appreciated.
BT:jt
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Federal Reserve Bank of St. Louis
THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS
C.1
3:11
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BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
March 17, 1982
CHAIRMAN
The Honorable Glenn Enclish
House of Representativ€:s
20515
Washington, D.C.
Dear Mr. English:
Thank you for your letter of March 3, concerning
possible deregulatory action by the Depository Institutions
Deregulation Committee at our next meeting on March 22. As
you know, the Committee has been charged by Congress with an
inherently difficult task--to phase out deposit interest rate
ceilings in order to increase the return to sawers while at
tbe same time taking into consideration the current difficult
situation of depository institutions, including, prominently,
many thrift institutions. At the Committee's most recent
meeting on December 16, a decision was made to postpone consideration of further deregulatory actions until the Committee's
next meeting on March 22. I joined in that dPcision in part
because some of the deregulatory proposals on the agenda might
have placed many thrift institutions under further earnings
pressures at a very inopportune time.
The Committee will reconsider various deregulatory
proposals at its meeting next week. It would be inappropriate
to comment on what decisions the Committee might reach at that
meeting. It should be noted, however, that as time goes on
the Committee's deregulatory mandate from the Congress and the
likely competitive position of all depository institutions
vis-a-vis money market funds and other market instruments will
require continued consideration of further deregulatory actions.
Let me assure you that, in consultation with DIDC
Chairman Regan and the other members of the Committee, I will
give serious consideration to the various proposals for deregulatory action at the upcoming meeting.
Sincerely,
NB:pjt (#V-54)
bcc: Norm Bernard
XXX Mrs. Mallardi (2)t.7
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
RAUL A. VOLCKER
Action assigned Mr. Bernard
GLENN ENGLISH
104 CANNON Houst OFFICE BUILDING
WASHINGTON, D.C. 20515
6TH DISTRICT, OKLAHOMA
(202) 225-5565
410 MAPLE STREET
YUKON, OKLAHOMA 73099
(405) 354-8638
AGRICULTURE COMMITTEE
GOVERNMENT OPERATIONS
COMMITTEE
AGRICULTURAL CENTER BUILDING
STILLWATER, OKLAHOMA 74074
(405) 377-2824
SELECT COM M ITTEE ON
NARCOTICS ABUSE AND CONTROL
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
FEDERAL BUILDING
CONGRESS OF THE UNITED STATES
ENID, OKLAHOMA 73701
(405) 233-92_24
HOUSE OF REPRESENTATIVES
WASHINGTON, D.C. 20515
March 2, 1982
Honorable Paul Volker, Chairman
Federal Reserve System
Federal Reserve Building
Washington, D.C. 20551
Dear Mr. Volker:
of the
I have recently been contacted by members
l District who
financial community from my Congressiona
d federal
have expressed concern over the continue
regulation of interest rates.
other members
I have been requested to contact you and
tion Committee to
of the Depository Institutions Deregula
be addressed at the
urge that interest rate deregulation
e of paramount
March 22 meeting of DIDC. This is an issu
request is
importance and your consideration of this
greatly appreciated.
Sincerely,
enn
embe
GLE/jml
gli h
of Congress
March 16, 1982
Tne honorable Lindy Boggs
House of Representatives
20515
Washington, D.C.
Dear Lindy:
Thank you for your letter of March 2, with which
iana
you enclosed correspondence from several bankers in Louis
uwho expressed concern that the Depository Institutions Dereg
various
lation Committee might continue to postpone action on
deregulatory proposals.
As you know, tne Committee has been charged by Congress
est
with an inherently difficult task--to phase out deposit inter
s while
rate ceilings in order to increase the return to saver
difficult
at the same time taking into consideration the current
nently,
situation of depository institutions, including, promi
recent
many thrift institutions. At the Committee's most
conmeeting on December 16, a decision was made to postpone
ttee's
sideration of further deregulatory actions until the Commi
part
next meeting on March 22. I joined in that decision in
a might
because some of the deregulatory proposals on the agend
earnings
have placed many thrift institutions under further
pressures at a very inopportune time.
The Committee will reconsider various deregulatory
ate
proposals at its upcoming meeting.- It would be inappropri
at that
to comment on what decisions the Committee might reach
goes on
meeting. It should be noted, however, that as time
ess and the
the Committee's deregulatory mandate from the Congr
tutions
likely competitive position of all depository insti
s will
vis-a-vis money market funds and other market instrument
ry actions.
require continued consideration of further deregulato
Let me assure you that, in consultation with DIDC
I will
Chairman Regan and the other members of the Committee,
deregugive serious consideration to the various proposals for
latory action at our next meeting.
Sincerely,
NB:pjt (#V-60)
bcc: Mr. Bernard
Mrs. Mallardi (2)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
SL Paul
LINDY (MRS. HALE) BOGGS. M.C.
Action assigned Mr. Bernard
WASHINGTON OFFICE:
2353 RAYBURN& BUILDING
ZD DISTRICT, LOUISIANA
WASHINGTON, D.C. 20515
COMMITTEE:
PEG K AVALJ I AN
ADM IN I STRATIVE ASSISTANT
APPROPRIATIONS
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Congre55 of tbe Einiteb
tette
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3DoufSe of RepresSentatibt5
Wassbington,;IC. 20515
°
March 2, 1982
-rs
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Honorable Paul A. Volcker
Chairman
Depository Institutions Deregulation Committee
20th and Constitution Avenue
Room B-2120
Washington, D.C. 20551
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Dear Chairman Volcker:
In view of the March 22nd meeting to be held by the
Depository Institutions Deregulation Committee, I
thought it appropriate to call the enclosed to your
attention.
You will see that I have been contacted by a
considerable number of banking individuals in Louisiana
who share the same opinions on matters which concern
your Committee. My hope is that you will be able to
give their comments your thorough and serious consideration,
and I hope, too, that these letters will be helpful as
the Committee proceeds with its responsibilities.
With all best wishes,
Sincerel;y,
LB:tr
Enclosure
Mrs.
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Charles W. McCoy, President
John J. Doles, Jr., President-Elect
James R. Foxall, Treasurer
Charles A. Worsham, Executive Vice President
Louisiana Bankers Association
February 22, 1982
The Honorable Lindy Boggs
United States House of Representatives
2353 Rayburn House Office Building
Washington, D.C.
20515
Dear Lindy:
On behalf of the Louisiana Bankers Association, let me urge you to support the
Depository Institution's Deregulation Committee in its effort to carry out the
Congressional mandate given them. The DIDC unfortunately postponed action on
their agenda for December 16 until March 22, 1982. At that time, they have
proposed to consider:
1.
The approval of a firm schedule for the gradual removal of deposit
interest rate ceilings (Reg Q), and,
2.
Authorize a short-term, ceiling free instrument for regulated
depositories which will allow competition for deposits now moving to
the mutual funds and other unregulated intermediaries.
Your support of their efforts is crucial. Banking has lost (as per the
enclosure) approximately eleven percent of the interest bearing consumer type of
accounts to the money market mutual funds. This projection, carried out to
1985, indicates that banking could lose approximately twenty-five percent of
this total market. As you well know, many Louisianans now participate in the
money market mutual funds to the detriment of all depository institutions (banks
and S&Ls). For these institutions to continu2 to be a viable part of the
national economy, we must have the phase-out of Regulation Q and a new
competitive instrument.
May we urge you to contact members of the DIDC and urge them to "get on with the
business on hand" and allow the regualated financial institutions to be
competitive. Banking cannot sit idly by on the sidelines much longer.
Louisiana's cities, towns and communities need this money that is now being
transferred out of state and even out of country. Give us the tools and we will
be competitive. If you do not give us the tools, the results could be
disasterous.
Charles A. Worsham
Executive Vice President
CAW/rv
Enclosure
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Post Office Box 2871 • Baton Rouge. Louisiana 70821 • 504 / 387-3282
ACTUAL AND PROJECTED MARKET SHARE OF
INTEREST BEARING CONSUMER-TYPE ACCOUNTS AT ALL
DEPOSITORY INSTITUTIONS AND MONEY MARKET FUNDS
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Guarantygricif
February 24, 1982
The Honorable Lindy Boggs
United S.tates House Of Representatives
2353 Rayburn House Office Building
Washington, D.C. 20515
Dear Li ndy:
I would like to urge your continued support for the Depository Institution
of
Deregulatory Committee (DIDC) that was created by Congress to get banks out
g on
the regulated impasse in which we currently exist. The DIDC had a meetin
December 16th, but most of the agenda was postponed until March 22, 1982. I
would like to urge you to support the DIDC in its effort to:
1.
Approve a firm schedule for gradual removal of deposit interest
rate ceil ings , and;
2.
Authorize a short-term, ceiling free instrument for regulated
depositories which will allow competition for desposits now moving
to mutual funds and other unregulated intermediaries.
cent
To date, the money market mutual funds have taken approximately eleven per
. It
of all deposits away from banks and other regulated depository institutions
has been conservatively estimated that by 1985, nonregulated, consumer-type
accounts could easily take twenty-five per cent of the funds out of the market
place. This money is not being plowed back into our local community as it would
be if it remained in our institution. We need to help Louisiana maintain its
follow
fair share of this market. Your positive response to DIDC urging them to
through on the mandate given to them by Congress will certainly break the
impasse that has been created. Please help us and all depository institutions
as we attempt to turn around the sagging U.S. economy.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Sincerely,
Nolen C. !tiler
President
P 0 Rox 101NEW ROADS, LOUISIANA 70760/(504) 638-8621
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ThenP0000999113sak
February 24,1982
The Honorable Lindy Boggs
Unit.ed States House of Representatives
2353 Rayburn House Office Building
Washington, D.C. 20515
Dear Lindy:
I would like to urge your continued support for the Depository
Institution Deregulatory Committee (DIDC) that was created by
Congress to deregulate deposit instruments offered by banks,
mutual savings banks, savings and loans, and credit unions.
At its December meeting DIDC postponed until March 22, 1982,
any attempt to deregulate or offer any new deposit instruments.
I would like to urge you to support the DIDC in its effort
to approve the following:
1.
A firm schedule for gradual removal of deposit
rate ceilings.
2.
The proposed interest bearing limited transaction
account with a $5,000 minimum deposit having no
interest rate ceiling when the minimum balance is
maintained. When the account falls below the minimum
the prevailing NOW account rate will apply. This new
instrument would be operationally simple and is an
excellent way to compete with the money market funds
now offered by noninsured institutions.
3
The proposed one-day notice, $25,000 minimum denomination certificate of deposit with no interest rate
ceilings and no early withdrawal penalties.
P. O. Box 711 / Lake Providence, Louisiana 71254 / 318-559-2595
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-2•
Your positive response to the DIDC urging them to follow through.
on the mandate given to them by Congress will certainly break
the.impasse that has been created. Please help us and all
depository institutions as we attempt to find ways to compete
in today's market place.
Very truly yours,
H. Gfaham Schneider
President
HGS:js
February 22, 1982
The Honorable Lindy Boggs
United States House of Representatives
2353 Rayburn House Office Building
Washington, D.C.
20515
Dear Congressman Boggs:
I would like to urge your continued support for the Depository
Institution Deregulatory Committee (DIDC) that was created by
Congress to get banks out of the regulated impasse that we
currently exist in. The DIDC had a meeting on December 16th, but
most of the agenda was postponed until March 22, 1982. I would
like to urge you to support the DIDC in its effort to:
Approve a firm schedule for gradual removal of
1.
deposit interest rate ceilings, and;
2. Authorize a short-term, ceiling free instrument for
regulated depositories which will allow competition for deposits
now moving to mutual funds and other unregulated intermediaries.
To date, the money market mutual funds have taken approximately
eleven per cent of all deposits away from banks and other
It has been conervatively
regulated depository institutions.
estimated that by 1985, nonregulated, consumer-type accounts could
easily take twenty-five per cent of the funds out of the market
This money is not being plowed back into our local
place.
community as it would be if it remained in our institution. We
need to help Louisiana maintain its fair share of this market.
Your positive response to DIDC urging them to follow through .on
the mandate given to them by Congress will certainly break the
Please help us and all depository
impasse that has been created.
institutions as we attempt to turn around the sagging U.S.
economy.
Sincerely,
S.B. Simpson
President
SBS/bah
Plaquemine Bank & Trust Company • P.O. Box 626 • Plaquemine, La. 70764 • 504/687-6388
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Lafourche National Bank 1,(t)
THIBODAUX LOUISIANA 70301
February 24, 1982
LUCIEN J. HEBERT, JR.
PRESIDENT
The Honorable Lindy Boggs
United States House of Representatives
2353 Rayburn House Office Building
Washington, D.C. 20515
Dear Mrs. Boggs:
The Depository Institutions Deregulation Committee (DIDC) met
on December 16, 1981 and at the urging of a large number of the
members of the House and Senate, postponed its agenda until
March 22, 1982.
As you know, DIDC was created by Congress and given a mandate to
phase out Regulation Q by 1986, and has yet to take any firm steps
to do so. We in the banking industry are sorely in need of a firm
schedule so that we can do some forward planning. We also are
desperately in need of a short-term, ceiling-free instrument which.
will allow us to compete with money market mutual funds and other unregulated financial intermediaries. I need not tell you how
money market mutual funds have grown in the past 2 or 3 years
mainly at the expense of the regulated financial institutions.
As a result this money is being drained off from the local communities where it would have been invested in housing and other
consumer type goods.
We urgently need your help in requesting DIDC to get on with its
job, that is to establish a firm schedule for the removal of
deposit interest rate ceilings and to help us get a ceiling-free
instrument so that we may again compete in the free market. I
would ask that you please contact the members of the committee
urging them to place these items on the agenda and to accomplish
them at their scheduled meeting of March 22, 1982.
ebert,Ay.
L.
President
LJH Jr/mb
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
S
TALLULAH STATE BANK
ANDREW FISHER
PRESIDENT
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
AND TRUST COMPANY
P. O. Box 1710
TALLULAH. LOUISIANA 71282
February 24, 1982
The Honorable Lindy Boggs
United States House of Representatives
2353 Rayburn House Office Building
Washington, D.C. 20515
Dear Congressman Boggs:
The Tallulah State Bank urges your continued support for the Depository
Institution Deregulatory Committee (DIDC) created by Congress to deregulate
the banking community. The DIDC will have a meeting on March 22, 1982 and
we urge you to support the DIDC in its effort to:
1.
Approve a firm schedule for gradual removal of deposit interest
rate ceilings, and;
2.
Authorize a short-term, ceiling free instrument for regulated
depositories which will allow competition for deposits now moving
to mutual funds and other unregulated intermediaries.
As you are well aware, the farming communities are being hit very hard by
present economic conditions. We need every dollar that belongs in our
communities to stay in our local community banks.
Your positive response to DIDC urging them to follow through on the mandate
given to them by Congress will certainly break the impasse that has been
created. Your support is most appreciated.
Yours sincerely,
Presid
SAF:mw
t
FIRST NATIONAL BANK
Jerry W. Brents
PRI sil,t \I
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Ni) CHOI'
XLCUTIVE OFP ICI R
Hon. Lindy Boggs
House Office Building
Washington, D.C. 20515
Dear Ms. Boggs:
I am writing you to ask that you oppose any legislation
that would delay the Depository Institutions Deregulation
Committee from exercising their mandate to deregulate deposit
rate ceilings.
The next meeting of the Committee is scheduled for
March 22, 1982. It is imperative that the deregulation process
enacted by Congress be allowed to continue. Regulated financial
institutions, such as our bank, must be allowed to compete with
the unregulated money market funds.
Please do whatever you can to insure that the March 22nd
meeting is no' postponed and the deregulation process continues
to go forward. I would greatly appreciate hearing from you in
this regard.
Yours truly,
Jerry W. Brents
President and Chief Executive Officer
666 Jefferson Street • Lafayette, Louisiana 70501 •(318) 232-1211
)
LOUISIANA ir)64/41
i/
AND TRUST COMPANY
CROWLEY, LOUISIANA
BUILT
BY
PUBLIC
70526
CONFIDENCE
CLARENCE D. ARDOIN
PPESII'll NT
February 22, 1982
•
The Honorable Lindy Boggs
United States House of Representatives
2353 Rayburn House Office Building
Washington, D.C. 20515
Dear Sir:
I would like to urge your continued support for the Depository Institution
Deregulatory Committee (DIDC) that was created by Congress to get banks out
of the regulated impasse that we currently exist in. The DIDC had a meeting
on December 16th, but most of the agenda was postponed until March 22, 1982.
I would like to urge you to support the DIDC in its effort to:
1.
Approve a firm schedule for gradual removal of deposit
interest rate ceilings, and;
2.
Authorize a short-term, ceiling free instrument for
regulated depositories which will allow competition
for deposits now moving to mutual funds and other unregulated intermediaries.
To date, the money market mutual funds have taken approximately eleven per
cent of all deposits away from banks and other regulated depository institutions. It has been conservatively estimated that by 1985, nonregulated,
consumer-type accounts could easily take twenty-five per cent of the funds
out of the market place. This money is not being plowed back into our local
community as it would be if it remained in our institution. We need to help
Louisiana maintain its fair share of this market. Your positive response to
DIDC urginE them to follow through on the mandate given to them by Congress
will certainly break the impasse that has been created. Please help us and
all depository institutions as we attempt to turn around the saggind U.S.
economy.
Sincerely,
LOUISIANA BANK & TRUST CO.
Clarence D. Ardoin
President
CDA/lms
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
AMr RICAN
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I'
•
•
American Bank
February 23, 1982
The Honorable Lindy Boggs
United States House of Representatives
2353 Rayburn House Office Building
Washington, D.C. 20515
Dear Representative Boggs:
I would like to urge your continued support for the Depository
Institution
Deregulatory Committee (DIDC) that was created by
Congress to get banks out of the regulated impasse that we currently
exist in. The DIDC had a meeting on December 16th, but most of the
agenda was postponed until Niarch 22, 1982. I would like to urge you
to support the DIDC in its effort to:
1.
Approve a firm schedule for gradual removal of deposit
interest rate ceilings, and;
2.
Authorize a short-term, ceiling free instrument for
regulated depositories which will allow competition for
deposits now
moving to mutual funds and other
unregulated intermediaries.
To date, the money market mutual funds have taken approximately
eleven per cent of all deposits away from banks and other regulated
depository institutions. It has been conservatively estimated that by
1985,
nonregulated,
consumer-type
accounts
could
easily
take
twenty-five per cent of the funds out of the market place. This money
is not being plowed back into our local community as it would be if it
remained in our institution. We need to help Louisiana maintain its fair
share of this market. Your positive response to DIDC urging them to
follow through on the mandate given to them by Congress will certainly
break the impasse that has been created.
Please help us and all
depository institutions as we attempt to turn around the sagging U.S.
economy.
Sincerely,
bJ`
)r, •
George '1\1. Campbell
Executive Vice President
GN1C:ch
BANK & TRUST COMPANY,P. O. BOX 7232, MONROE, LOUISIANA 71203, PHONE 318/362-8200, MEMBER FDIC
7.77/IVEST CAR.17OLL
''.71e17:1101V4---1.
P. O. BOX 708 OAK GROVE, LA. 71263
TELEPHONE 428-4221
February 23, 1982
The Honorable Lindy Boggs
United .States House of Representatives
2353 Rayburn House Office Building
Washington, D.C. 20515
Dear Representative Boggs:
I would like to urge your continued support for the Depository
Institution Deregulatory Committee (DIDC) that was created by Congress to
get banks out of the regulated impasse that we currently exist in. The
DIDC had a meeting on December 16th, but most of the agenda was postponed
until March 22, 1982. I would like to urge you to support the DIDC in its
effort to:
1.
Approve a firm schedule for gradual removal of deposit
interest rate ceilings, and;
2.
Authorize a short-term, ceiling free instrument for regulated
depositories which will allow competition for deposits now
moving to mutal funds and other unregulated intermediaries.
To date, the money market mutual funds have taken approximately eleven
per cent of all deposits away from banks and other regulated depository
institutions. It has been conservatively estimated that by 1985,
nonregulated, consumer-type accounts could easily take twenty-five per cent
of the funds out of the market place. This money is not being plowed back
into our local community as it would be if it remained in our institution.
We need to help Louisiana maintain its fair share of this market. Your
positive response to DIDC urging them to follow through on the mandate
given to them by Congress will certainly break the impasse that has been
created. Please help us and all depository institutions as we attempt to
turn around the sagging U.S. economy.
Sincer
Wil4AM E. Pratt
President
WEP/lb
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
CITY BANK & TRUST COMPANY
P. O. BOX 246
J. E. PIERSON
-
PHONE 318 - 352-4416
NATCHITOCHES, LA. 71457
PRESIDENT
February 22, 1982
The Honorable Lindy Boggs
United States House of Representatives
Room 206, Cannon House Office Building
Washington, D. C. 20510
Dear Lindy:
I am firmly convinced that one major problem facing banks
in the next few years will be in relation to the loss of funds by
banks to the money market mutual funds.
Just this last week, I
lost over $400,000.00 from just one person.
This means that this
$400,000.00 is less the funds available for me to lend to
businesses, farmers and various other customers in and around
Natchitoches.
I do not know exactly where the money market
mutual funds finally wind up, but I have not as yet seen them
making any loans in Natchitoches.
I am thinking it most important that the DIDC deve/ope a
phase-out schedule which will bring about the total elimination of
Regulation Q.
It is most important that there be a short term,
ceiling free instrument for banks to allow competition for deposits
that are moving in the mutual funds.
I urge that you let your feelings be known to the DIDC so
that at its meeting on March 22, 1982 the DIDC will know that it
has your support.
This will help bring an end to the impasse
that has been created.
Yours very truly,
J. E. Pierson
President
. .
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BANK OF IBERIA
February 25, 1982
The Honorable Lindy Boggs
United- States House of Representatives
2353 Rayburn House Office Building
Washington, D.C.
20515
Dear Congresswoman Boggs:
I would like to urge your continued support for
the Depository
Institution Deregulatory Committee (DIDC) that was
created by
Congress to get banks out of the regulated impa
sse that we
currently exist in. The DIDC had a meeting
on December 16th,
but most of the agenda was postponed unti Marc
l
h 22, 1982. I
would like to urge you to support the DIDC
in its effort to:
LU
CC
1.
Approve a firm schedule for gradual removal of
deposit interest rate ceilings, and;
2.
Authorize a short-term, ceiling free instrume
nt
for regulated depositories which will allow
competition for deposits now moving to mutual
funds and other unregulated intermediaries.
To date, the money market mutual funds
have taken approximately
eleven per cent of all deposits away from
banks and other regulated
depository institutions. It has been cons
ervatively estimated
that by 1985, nonregulated, consumer-type acco
unts could easily
take twenty-five per cent of the funds out of
the market place.
This money is not being plowed back into our
local community as
it would be if it remained in our institution.
We need to help
Louisiana maintain its fair share of this mark
et. Your positive
response to DIDC urging them to follow through
on the mandate
given to them by Congress will certainly break
the impasse that
has been created. Please help us and all depo
sitory institutions
as we attempt to turn around the sagging U.S.
economy.
Sin
ely,
W.
1.7
2
,
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ol
Delah.:ssaye
President and Chief Executive Officer
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https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
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THE OUACHITA NATIONAL BANK IN MONROE
essir IC C )11
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MONROE, LOUISIANA 71201
ROBERT A BARBER
VICt PRESIDENT & AUDITOR
The Honorable Linda Boggs
Representative in Congress
1524 Longworth House Office
Washington, D. C. 20013
March 5, 1982
Building
Dear Mrs. Boggs:
This letter is written to urge your support of the DIDC in
the adoption of a dependable schedule for phasing out Reg. Q
and the interest rate differential, and the creation of some
new type of deposit instrument that competes with money market
and mutual funds. It is my belief and opinion that if this
is not done, we will see a gradual demise of the banking
industry and a continued erosion of the Federal Reserve's
ability to control the money supply.
It is also better to have a free economy and have individual
competition set rates as opposed to any arbitrary guidelines
set up by government agencies.
Thank you for your time and consideration of this letter.
Respectfull
yours,
Robert A. Barber
Vice President & Auditor'
RAB:hh
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4.
CITIZENS BANN
6, TRUST COMPANY
P 0 BOX 819 THIBODAUX
LA 70301
JOSEPH F. QUINLAN JR
ExECUTIVE VICE PRESIDENT
March 2, 1982
The Honorable Lindy Boggs
United States House Of Representatives
2353 Rayburn House Office Building
Washington, D. C. 20515
Dear Congresswoman Boggs:
I would like to urge your continued support for the Depository
Institution Deregulatory Committee (DIDC) that was created by
Congress to get banks out of the regulated impasse that we currently
exist in. The DIDC had a meeting on December 16th, but most of
the agenda was postponed until March 22, 1982. I would like to
urge you to support the DIDC in its effort to:
1.
Approve a firm schedule for gradual removal of
deposit interest rate ceilings, and;
2.
Authorize a short-term, ceiling free instrument
for regulated depositories which will allow
competition for deposits now moving to mutual
funds and other unregulated intermediaries.
To date, the money market mutual funds have taken approximately
eleven per cent of all deposits away from banks and other regulated
depository institutions. It has been conservatively estimated
that by 1985, nonregulated, consumer-type accounts could easily
take twenty-five per cent of the funds out of the market place.
This money is not being plowed back into our local community as
it would be if it remained in our institution. We need to help
Louisiana maintain its fair share of this market. Your positive
response to DIDC urging them to follow through on the mandate
given to them by Congress will certainly break the impasse that
has been created. Please help us and all depository institutions
as we attempt to turn around the sagging U. S. economy.
Sincerely,
ki
t
•
(
r)
Jcgseph F. Quinlan, Jr.
Executive Vice President
JFQ/kr
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
THE FIRST NATIONAL BANK
OF JEANEHETTE
ESTABLISHED
1905
JEANERETTE, LOUISIANA 70544
February 26, 1982
WM. S PATOUT. JR.
PREsiDcNT
GORDON RANSONET
ASST.
ST. PAUL BOURGEOIS. III
MANAGER
RENE BAUDRY
VICE•PRESIDENT
DIANN
ELTON J. BEAULLIEU, JR.
B. DERISE
AUDREY M. HARRIS
VICE•PRESIDENT
EXECUTIVE
CASHIER • BRANCH
•
NADRA L
LEBLANC
ASST. CASHIERS
GERARD ELDRIDGE
VICE-PRESIDENT • CASHIER
MARINE DODSON
ASST.
VICE.PRESIDENT
The Honorable Lindy Boggs
United States House of Representatives
2353 Rayburn House Office Building
Washington, D. C. 20515
Dear Representative Boggs:
I would like to urge your continued support for the Depository
Institution Deregulatory Committee (DIDC) that was created by Congress to
get banks out of the regulated impasse that we currently exist in. The
DIDC had a meeting on December 16th, but most of the agenda was postponed
until March 22, 1982. I would like to urge you to support the DIDC in
its effort to:
1.
Approve a firm schedule for gradual removal of deposit
interest rate ceilings, and;
2.
Authorize a short-term, ceiling free instrument for
regulated depositories which will allow competition for
deposits now moving to mutual funds and other unregulated
intermediaries.
To date, the money market mutual funds have taken approximately
eleven per cent of all deposits away from banks and other regulated depository
institutions. It has been conservatively estimated that by 1985, nonregulated, consumer-type accounts could easily take twenty-five per cent
of the funds out of the market place. This money is not being plowed back
into our local community as it would be if it remained in our institution.
We need to help Louisiana maintain its fair share of this market. Your
positive response to DIDC urging them to follow through on the mandate given
to them by Congress will certainly break the impasse that has been created.
Please help us and all depository institutions as we attempt to turn around
the sagging U. S. economy.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
rely,
Elton
Beaullieu,
Charles W. McCoy, President
John J. Doles, Jr., President-Elect
James R. ['mall, Treasurer
Charles A. Worsham, Executive Vice Presidcnt
Louisiana Bankers Association
March 2, 1982
The Honorable Lindy Boggs
United States House of Representatives
2353 Rayburn House Office Building
Washington, DC 20515
Dear Lindy:
If the headlines, "Sears Promises to Have a Bank at Every Outlet" didn't wake
us, then maybe nothing will. The enclosed article which appeared in the
February 26 American Banker certainly points out what Sears and other parties
interested in getting into the financial industry plan on doing. In order for
banks to maintain their viable position, we must be given additional powers with
which to compete.
I have written you once before, but I felt like these headlines required a
follow-up letter concerning this position. May we urge you to contact members
of the DIDC and urge them to; 1) vote to adopt a permanent phase-out of
Regulation Q on March 22, and; 2) adopt a short-term instrument that will allow
banks to compete with the money market mutual funds. We must have these tools
in order to remain the leaders in the financial services industry.
Sincerely,
Charles A. Worsham
Executive Vice President
CAW/dh
Enclosure
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Post Office Box 2871 • Baton Rouge, Louisiana 70821 • 504 / 387-3282
Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Newspaper article
Citations:
Number of Pages Removed: 1
Morris, John. "Sears Promises To Have a Bank At Every Outlet." American Banker, February
26, 1982.
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
FIDELITY
NATIONAL
BANK
of Baton Rouge
POST OFFICE DRAWER 3597 BATON ROUGE,
LOUISIANA 70821 / PHONE (504) 387-2171
FRANK S CRAIG,JR
Chairman of the Board
and
February 25, 1982
Chief Executive Officer
The Honorable Lindy Boggs
United States House of Representatives
2353 Rayburn House Office Building
Washington, D.C. 20515
Dear Lindy:
The Depository Institution Deregulation Committee will meet on March
22, 1982, to consider several issues of vital importance to the structure and
stability of the financial institutions of the nation. As its title indicates,
DIDC has been given a mandate by Congress to provide a phased-in deregulation of
the depository instruments which are currently circumscribed by various regulations.
The DIDC has postponed taking effective action, in part because of opposition to
the type of deregulation for which the committee was created.
The presently regulated depository institutions, of which our bank is
one, are part of a financial system through which moves the economic lifeblood
of our country. The system accumulates and uses funds very efficiently, and
because of location and involvement in various local communities, supply financial
services and credit needs in all these local areas.
However, the stability of the entire banking system is being threatened
by the development of nonregulated fund gathering activities, with which regulated
banks cannot really compete because of restrictions on both their liabilities
and assets. The DIDC needs to act promptly and affirmatively to approve a
schedule for removal of deposit interest rate ceilings, and to authorize regulated
depository institutions to issue instruments, and operate mutual funds which
will permit them to compete with unregulated intermediaries.
I solicit your support in urging the DIDC to help sort out the dangerous
irrationality of the present financial system. To paraphrase Lincoln, the
financial institutions of our nation can not continue to exist half regulated,
and half free.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
s very tru
f
/ 07
Frank S. Craig, Jr.
Chairman of the Board and
Chief Executive Officer
•__
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AL BANK
HIBERNIA NATION
P. O. Box 61540
LA. 70161
NEw ORLEANS,
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SILLA, JR.
THOMAS A. MA
PRESIDENT
EXECUTIVE VICE
:
.
2
March 1, 198
Lindy Boggs
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Washington, D
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Dear Madam:
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Federal Reserve Bank of St. Louis
the
e efforts of
th
t
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s
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C).
to urge you
ommittee (DID
C
y
r
o
t
I am writing
a
l
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g
e
r
king
stitution De
s to free ban
s
e
r
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d
ich currently
e was create
h
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it
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t
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g
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h
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ntly postpone
t of the DIDC
r
o
p
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s
r
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o
Y
The DIDC rece
2.
irm
March 22, 198
proval of a f
p
a
:
d
e
d
e
e
n
scheduled for
ntly
areas is urge
interest rate
t
i
s
o
p
e
d
of
two important
l
emova
eiling
the gradual r
short-term, c
a
schedule for
of
n
o
i
t
a
low
z
the authori
hich will al
w
s
e
i
r
o
t
i
s
o
p
ceilings and
ted de
ds and
nt for regula
e
m
u
r
t
s
n
i
o mutual fun
t
e
e
ng
r
f
vi
mo
w
o
n
or deposits
.
competition f
ntermediaries
i
d
te
la
gu
re
other un
of
antial share
t
s
b
u
s
a
n
ke
have ta
ll
mutual funds
this trend wi
t
e
at
k
r
th
a
m
d
te
y
e
ec
n
o
M
is proj
cause
osits, and it
p
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e
is process be
l
b
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a
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e
s
o
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ey were deal communiti
th
c
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if
s
.
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t
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n
co
loc
th
not redeployed
, however, wi
t
e
o
r
n
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s
s
i
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f
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ob
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h
The pr
local bank.
mitations whic
i
a
l
e
th
th
wi
,
d
r
e
te
h
t
posi
s. Ra
ee market ent mutual fund
e
fr
k
r
a
a
m
in
y
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ne
n
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t
e
the
m comp
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ict banks fro
en mandated b
r
t
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en
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r
a
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vi
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t
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r
r
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c
to
Congress
omplete
ing them to c
g
r
u
by
C
D
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the
ine response to
all depository
by
d
te
ia
ec
Your positiv
appr
will be most
their charter
stitutions.
Sincerely,
a
homas A. Masill
,
I
March 1, 1982
The Honorable Lindy Boggs
United States House of Representatives
2353 Rayburn House Office Building
Washington, D.C. 20515
Dear Mrs. Boggs:
I would like to urge your continued support for the Depository Institution
Deregulatory Committee (DIDC) that was created by Congress to get banks
out of the regulated impasse that we currently exist in. The DIDC had a
meeting on December 16th, but most of the agenda was postponed until
March 22, 1982. I would like to urge you to support the DIDC in its
effort to:
1.
Approve a firm schedule for gradual removal of deposit interest
rate ceilings, and;
2.
Authorize a short-term, ceiling free instrument for regulated
depositories which will allow competition for deposits now
moving to mutual funds and other unregulated intermediaries.
To date, the money market funds have taken approximately eleven per cent
of all deposits away from banks and other regulated depository institutions.
It has been conservatively estimated that by 1985, nonregulated, consumertype accounts could easily take twenty-five per cent of the funds out of
the market place. This money is not being plowed back into our local
community as it would be if it remained in our institution. We need to
help Louisiana maintain its fair share of this market. Your positive
response to DIDC urging them to follow through on the mandate given to
them by Congress will certainly break the impasse that has been created..
Please help us and all depository institutions as we attempt to turn
around the sagging U. S. economy.
Sincerely,
//
)
41
Cflard M.} o i
President
RMII:bb
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
AMERICAN BANK - P. 0. BOX 70 - NORCO, LA 70079 - (504) 764-7581
OFFICES ALSO IN LULING - HAHNVILLE - DESTREHAN
Ilias.
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