View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

f r e c e A ^ C j fl|<sco^»vtr
T H E S E C R E T A R Y OF T H E T R E A S U R Y
W A S H I N G T O N , D. C . 2 0 2 2 0

O c t o b e r 9, 1967
M E M O R A N D U M F O R THE P R E S I D E N T
Subject: Q u a d r i a d M e e t i n g —

Conversation with Martin

Y o u w i l l b e g e t ti n g a separate m e m o r a n d u m f rom Gardner
c o n t a i n i n g s u gg e st e d a g en d a items for the m e e t i n g w h i c h w e
h a v e b e e n discussing.
This m e m o r a n d u m is to prov i de y o u w i t h b a c k g r o u n d inform­
a t i o n on m y luncheon m e e t i n g today w i t h Bill M a r t i n (who
r e t u r n e d to the c o u n t r y o v e r the weekend) and G o ve r no r Robertson
of the Fed.
I gave them a full r e v i e w of events leading to the present
s i tu a ti o n w i t h the W ays a n d M ea n s Committee, including; the
p o s i t i o n Mill s took in the Exec u ti v e S e ss i on of Way s a nd Means
C o m m i t t e e on S e p te m be r 21, the developments the following w e e k
in c o n n e c t i o n w i t h the r e j e ct i on of the c o n ti n ui n g Resolution
a n d the Bow A m e n d m e n t , the m e e t i n g in E xe c u t i v e S e s s io n of the
W a y s a n d Means C o m m i t t e e last Tuesday, O c t o b e r 3, w h e n the
W a t t s m o t i o n was adopted, y o u r statement to the press on
Thursday, the Mi l l s st a t e m e n t on Friday, a n d y o u r exc ha n ge w i t h
the F e d e r a l H ome L o a n B ank Boar d P re sidents on Friday.
W h i l e I r e l a t e d the f act that y o u h a d a u t h o r i z e d m e to
a d v a n c e c e r t ai n p r o c e d u r a l proposals to the Ways an d Means
C o m m i t t e e last T u e s d a y w h i c h I was n ot g i v e n an o p p o rt u ni t y to
p r e s e n t a n d k e y e d M a r t i n to the paragraphs in y o u r statement
and in the press c o n f e r e n c e o n Thursday co n c e r n i n g y o u r w i l l i n g ­
ness to explore pr o c e d u r a l alternatives c o n si s te n t w i t h y o u r
Tax M essage, I did n o t discuss the s u b s t an c e o f any o f the
p r o p o s a l s n o r did I r e fe r to the m e e t i n g o r are a dis c us s ed in
Mr. C a l i f a n o ' s o f f i c e Saturday.

J

B o t h M a r t i n a n d R o be r ts o n indicated that the pressures on
the F e d to take s ome action w e r e intensifying, p ar t ic u l a r l y from
some o f the reg i o na l b a n k presidents.
However, they w e r e able
to a v o i d a n y d e c is i on a n d m a i n t a i n the status quo at the m e e t i n g




COPY

LB J

LIBRARY

- 2 last T u e s d a y of the FOMC w h i c h c o n c l u d e d jus t p r i o r to the
a c t i o n of the Ways and Mean s Committee.
They fur t he r indicated
their j u d g m e n t that it w o u l d b e a m i s t a k e to take any action
in the w a y o f a cha ng e fr o m a poli c y of mo n e t a r y ease at this
time despi te these internal pressures.
Apparently, they w i l l
take a n o t h e r look at the s ituation on O c t o b e r 24 (the n e xt
m e e t i n g date o f the FOMC) w h i c h happens to be the day following
the t er m i n a t i o n of the pres en t c o n t in u in g R e s o l ut i on on
appropriations. M y own h u n c h is that there is a g o o d case for
m a i n t a i n i n g the status quo at least until after o u r Treasury
f inan c in g w h i c h w i l l b e out of the w a y in early N o v e m b e r -a l th o ug h som e tentative decisions c o uld be taken p r i o r to that
time.
Y o u m a y be interested in reading two of the m a r k e t letters
w h i c h c a m e in today w h i c h are attached. The one entit l ed
"Reporting on Gover n me n ts " is b y Sylvia Porter.
The m a n y
problems c o nf r o n t i n g the F e d in c h a n gi n g its eas y m o n e y policy
are s u m m a r i z e d n e a t l y in the second p a r a g ra p h of the attached
L a n s t o n letter.

fXvvaa-v (4 '
Henry H. F o w l e r
A tt a ch m en t s




COPY

LBJ

LIBRARY

on Governments
•Weekly analysis a n d forecast o n u .s.g o v e r n m e n t securities,
W ashi n g t o n m o n e t a r y policies a n d trends in interest rates
*
k

Editor, S. F. Porter • Publisher, G. Sumner Collins
TWO FIFTH AVENUE, NEW YORK, N.Y. 10011

Washington, October 6, 1967
Dear S ir :
P rosp ects fo r a ta x in c r ea se are fad ing, and th a t f a c t i s th e dominant
in flu e n c e in c r e d it m a r k e ts .... The outlook fo r debt s e c u r it ie s , b ea rish fo r so
long, w ill d e te r io r a te fu rth e r u n le ss the tax plan i s r e v i v e d ....
D esp ite th e ta x deadlock, the Federal Reserve r e fu s e s to g iv e up hope fo r
f i s c a l a c t i o n . . . . For the time b ein g, the money managers can be expected to con­
tin u e op eratin g on the assum ption th a t Congress w ill r a is e t a x e s . . . .
1) P resid en t Johnson’s su rta x proposal i s alm ost, but not q u ite , dead fo r
t h is y e a r . . . . Only a slim chance remains fo r b rin g in g i t back to l i f e .
according to the members o f Congress who c o n tr o l the s i t u a t i o n . . . .
Ever s in c e th e P r e s id e n t's Aug. 3 tax message, we have reported th a t the
tax in o r e a se plan faced a tough f i g h t . . . . "Congress may r efu se to r a is e ta x e s a t
a l l , " we warned Aug. 1 8 . . . . "The P r e sid e n t's proposal fo r ta x in c r ea se s i s in grave
tr o u b le ," we s a id S ep t. 1 5 . . . . W reported s ta r tin g S ep t. 15 th a t the House Ways
e
and Means Committee probably would sh e lv e the tax is s u e u n le s s the a d m in istra tio n
recommended sharp spending c u t s . . . . "President Johnson's tax in c r ea se p rop osals
are in deep tr o u b le," we s a id l a s t week, adding: "The committee may d ecid e b efo re
long to la y the ta x program a s i d e " . . . .
T h a t's what the committee did Oct. 3, in a s ta g g e r in g blow to J o h n s o n ....
By th e lo p sid ed v o te o f 2 0 -5 , the committee "temporarily" ta b led the ta x p rop osals
and decided th a t "fu rth er c o n sid e ra tio n ( w ill) be d eferred u n t il such time as the
P resid en t and the Congress reach an understanding o n .. .more e f f e c t iv e expenditure
red u ction and c o n tr o ls as an e s s e n t ia l c o r o lla r y to fu rth er c o n sid e ra tio n o f a tax
i n c r e a s e " .... Chairman Wilbur D. M ills , D-Ark., in sp ir e d th e m o t io n ....
Rep. A1 Ullman, D -O re., the com m ittee's str o n g e st advocate o f a ta x in ­
c r e a se , seconded th e m otion, which was o ffer ed by Rep. John C. W atts, D -K y ....
Ullman exp lain ed th a t he hoped th e com m ittee's a c tio n would convince the P resid en t
th a t he must come through w ith spending cu ts to save th e ta x b i l l . . . . M ills sa id
" i t ' s h op eless" to tr y to push a ta x in crea se through the committee or the House
u n le s s spending i s r e d u c e d .... Even i f Johnson c u ts spending sh a rp ly , M ills sa id ,
th e r e 's no assurance th a t Congress w i l l r a is e t a x e s . . . .
Although the committee has made i t s p o s itio n on spending p e r f e c t ly c le a r ,
the P r e sid en t has refu sed so fa r to y i e l d . . . . Again a t a news conference Oct. 5,
he s a id Congress should tak e th e le a d by c u ttin g a p p ro p ria tio n s b i l l s , and then he
w i l l review them in search o f spending r e d u c t io n s .... He in s is t e d th a t Congress
proceed w ith a ta x b i l l in th e m e a n tim e .... M ills and most House members refu se to



COPY

LBJ

LIBRARY

The FO C can confer and take p o lic y a c tio n s by phone between m eetings, o f
M
cou rse, but probably does not co n sid er the s it u a t io n c r i t i c a l enough to require
such emergency p r o c e d u r e s .... The tax outlook and other fa c to r s w i l l be re-examined
c lo s e ly a t the next FO C m eeting Oct. 2 4 . . . .
M
C onclusions reached then w i l l depend on the s ta tu s o f the tax fig h t and
the l a t e s t reading o f the in f la t io n barom eter----- Barring a c le a r -c u t r e je c tio n
o f th e su rta x , the money managers w i l l be in c lin e d to keep h o p in g .. . . The Ways and
Means Committee has been c a r e fu l to keep the door open to a tax in c r ea se in case
the sta lem a te over spending red u ctio n s s o f t e n s . . . .
3) The c e n tr a l bank has been r e lu c ta n t to tig h te n c r e d it p a r tly because i t
wants to avoid the appearance o f p ressu rin g Congress on ta x e s , which could
b a c k f i r e . . . . More fundam entally, the Federal does not b e lie v e monetary
p o lic y can be an e f f e c t i v e s u b s t it u t e fo r f i s c a l r e s tr a in t now .. . .
The main source o f in f la tio n a r y p ressu re now i s th e huge p o t e n tia l budget
d e f i c i t , accordin g to the money managers' a n a l y s i s . . . . T herefore, they f e e l , the
r a tio n a l, d ir e c t way to f ig h t in f la t i o n i s to s la s h the d e f i c i t by r a is in g ta x es
and reducing e x p e n d it u r e s .... Even i f a tig h te r monetary p o lic y curbed borrowing
and demand in the p r iv a te s e c to r , a s tim u la tiv e f i s c a l p o lic y would more than
can cel out the r e s tr a in in g e f f e c t s . . . . B esid es, the Federal agrees w ith the c r i t i c s
who complain th a t t ig h t c r e d it i s in e q u ita b le and d a n g e r o u s ....
This relu cta n ce to r e ly h e a v ily on monetary p o lic y does not mean the c e n tr a l
bank b e lie v e s i t has no r o le to p la y in fig h tin g i n f l a t i o n . . . . The money managers
expect to p la y a supporting r o le to f i s c a l p o l i c y . . . . They were w orried about the
rapid expansion o f the money supply and bank c r e d it e a r li e r t h is y ea r, and r e a liz e d
i t could not be su sta in e d s a f e l y . . . . T his expansion has moderated s i g n if i c a n t l y in
r ecen t w eeks, m ainly because demand fo r o r e d it has sla ck en ed , ra th er than as a
r e s u lt o f p ressu re on the supply o f r e s e r v e s . . . . The c e n tr a l bank i s p lea sed about
the m oderation, and perhaps has encouraged the trend through a form o f p a ssiv e
rath er than p o s it iv e tig h t e n in g . . . . R elying on market fo r c e s , the Federal has
allow ed high in t e r e s t r a te s to d e te r borrowing s l i g h t l y . . . .
4) I f Congress r e fu s e s to r a is e ta x e s , the Federal may be forced to take
more vig o ro u s a c tio n to r e s tr a in in f la t io n , d e s p ite the c o n v ic tio n th a t
t ig h t o r e d it would not be very e f f e c t i v e . . . . The o b je c tiv e would be to
curb th e e x c e s s iv e p r iv a te demand generated by f i s c a l s t i m u l a t i o n ....
An a d m in istr a tiv e budget d e f i c i t approaching $29 b i l l i o n would require
m assive Treasury b orrow in g.. . . I n te r e s t r a te s would shoot up and many p o te n tia l
borrowers would be shouldered a s id e , reg a rd less o f monetary p o l i c y . . . .
Market str in g e n c y would be so sev ere i f Congress r e je c te d a tax boost th a t
the q u estio n o f whether to tig h te n monetary p o lic y might be alm ost academic at
f i r s t . . . . In stea d o f a c tin g im m ediately to in t e n s if y the m arket's tig h tn e s s , the
Federal might have to cushion the impact by augmenting r ese rv e s fo r a w h i l e . . . . I t
could be a m atter o f p ic k in g up the p ie c e s in an e f f o r t to prevent d is o r d e r ly con­
d i t i o n s . . . . Even w ith the Federal working to a lle v i a t e the str in g e n c y , c r e d it would
be t ig h t e r than in many years and in t e r e s t r a te s would s o a r ----The th r e a t o f sev ere c r e d it str in g e n c y i f ta x e s are not r a ise d has in sp ire d
a new flu r r y o f con jectu re about c r e d it c o n tr o ls - e ith e r form al, compulsory con­
t r o ls or g u id e lin e s pattern ed on th e "voluntary'* balance o f payments program----


COPY

LB J

LIBRARY

accep t t h is approach.. . . 7/hile tr y in g to trim ap p ro p ria tio n s, they demand th a t the
P resid en t take th e i n i t i a t i v e by sending Congress a new l i s t o f program p r i o r i t i e s
- recommending a t le a s t $5 b i l l i o n o f red uctions in planned expenditures t h is f i s ­
c a l year out o f funds appropriated t h is year and in p a st y e a r s . . . . A lte r n a tiv e ly ,
th e economy b lo c wants Johnson to accept an expenditure c e il i n g th a t would fo rce
him to reduce nondefense spending by $5 b i l l i o n or more t h is y e a r . . . .
T here's h y p o c r itic a l buck-passing on both s id e s in the spending s q u a b b l e . . . .
N e v er th e le ss, deep red u ction s are the p r ic e demanded by the economizers fo r s e r io u s ­
ly c o n sid erin g a tax in c r e a se , and they are in c o n t r o l . . . . Johnson apparently has
misjudged t h e ir t e n a c i t y . . . . And he has hurt h is chances fo r g e ttin g a ta x b i l l by
f a i l i n g to m aintain p erson al con tact w ith M il ls and h i s com m ittee, according to
co n g ressio n a l s o u r c e s . . . . They s a id t h is week th a t he had not phoned or c a lle d in
committee members to ta lk about ta x es s in c e h is Aug. 3 me s sa g e .. . . Committee mem­
bers r ese n t t h is s ta n d o ffis h a t t i t u d e . . . . Puzzled by Johnson's t a c t i c s , a few
Congressmen su sp ect th a t he r e a lly does not want a taut b o o s t . . . .
What are th e chances fo r breaking the s t a le m a t e ? . . . . Johnson could y ie ld
and send Congress a l i s t o f recommended spending c u t s . . . . I f Congress balked a t
deep red u ction s in popular programs - which probably i s what would happen - the
P resid en t a t le a s t would have c a lle d the b lu f f and the tax plan might be s a v e d . . . .
But Johnson has been so adamant th a t i t would be hard fo r him to rev erse h im se lf
. . . . The House may p a ss an expenditure c e i l i n g when the is s u e a r is e s again la t e r
t h is month, but the Senate probably would re.ieot i t . . . . Although the House Appro­
p r ia tio n s Committee w i l l recommend red u ctio n s, th e Senate i s l i k e l y to balk - and
th e t o t a l sa v in g s would not be enough to s a t i s f y the econom izers, anyw ay ... .
Johnson's own e f f o r t s to cut spending - e x em p lified by the Pentagon's Oct. 5
announcement o f a fr e e z e on some c o n str u c tio n - l i k e l y w i l l f a l l sh o rt o f the
House ta r g e t, t o o . . . .
Even i f the impasse over spending somehow i s broken, the time i s growing
la t e fo r enactment o f a tax in c r ea se t h is year to take e f f e c t Jan. 1 . . . . With
m iraculous speed and a sudden surge o f good w i l l , the House could co n ceiv a b ly pass
a b i l l in e a r ly November, though i t ' s d o u b t f u l . . . . Then the b i l l would fa c e a fig h t
in the S en ate, a t a time when adjournment fev er w i l l be grip p in g C o n g r e s s . . . .
I t i s d i f f i c u l t to escape the co n clu sio n th a t Congress w il l not enact a
ta x in c r e a s e u n t il 1968, i f t h e n . . . . By n ext year, perhaps, the p r e d ic tio n s o f
a c c e le r a tin g i n f la t io n and so a rin g in t e r e s t r a te s may come tr u e , persuading Con­
g r e ss to r a is e t a x e s . . . . At th e moment, however, th ere i s l i t t l e prospect even for
approval o f a tax b i l l by the Ways and Means Committee, which i s the e s s e n t ia l
f i r s t s t e p . . . . An in f lu e n t i a l member o f the committee put i t b lu n tly : "Don't be
su r p r ise d i f t h e r e ' s no such th in g as a temporary ta b lin g o f a su r ta x” . . . .
2) The F ederal R eserve i s so fir ml y convinced o f the need fo r a tax in ­
crea se th a t the money managers cannot b e lie v e Congress may re.iect the pro­
p o s a l . . . . They s t i l l hope the su rta x w i l l be saved - p u ttin g the main burden o f f i g h t i n g in f la t io n on f i s c a l p o lic y and a llo w in g monetary p o lic y to
p la y a s u b sid ia r y r o l e . . . .
By c o in c id e n c e , th e Federal Open Market Committee h eld i t s regu lar meeting
on the same day th a t Ways and Means sh elv ed the tax i s s u e ----- The FO C m eeting
M
ended b e fo r e Ways and Means a c te d , and th e money managers apparently d id not know
what was co ming .. . . Apart from oth er c o n sid e r a tio n s, th e r e fo r e , i t i s most un­
l i k e l y th a t th ey voted fo r any o v e rt s h i f t o f p o lic y Oct. 3 .



COPY

LB J

LIBRARY

The idea is that the Federal would try to allocate inadequate supplies of credit
as equitably as possible among deserving borrowers....
All this talk about selective credit controls originates in the markets,
not at the Federal.... The situation could change, but right now the money manag­
ers and the administration show no interest in controls.... One reason is that
controls create nightmarish administrative problems, with imperfect results at
best.... The second, more important reason is that selective controls would not
attack the main problems confronting the credit markets....
A letter from the Federal to banks asking them to curtail business loans
- the approach taken in September 1966 - seems rather pointless now, when business
loan demand is almost sluggish.... A capital issues committee to screen proposed
bond offerings would make little sense, either, since new corporate issues appear
to be slowing down a bit.... Similarly, the growth of consumer credit is moderate,
so it is difficult to argue for controls in that area....
The basic problem facing the credit markets is the threat of excessive
borrowing by the Treasury to finance a huge budget deficit, and the Treasury is
not susceptible to credit controls....
5) The bond market retreated early in the week because of the tax pro­
gram's troubles, and in disappointment at the lack of any dramatic new
peace initiatives in the President’ Sept. 29 Vietnam speech....
s
Even after the latest price decline, the market remains a long wav from
fully discounting a rejection of Johnson's surtax plan.... The market, like the
Federal, still has hopes.... If Congress finally and clearly refuses to raise
taxes this year, bond prices will drop further....
In the Treasury's Oct. 3 auction of tax anticipation bills, subscriptions
for the June taxis barely covered the $3 billion offered.... Banks and others
apparently found the April taxis more attractive.... Subscribers acquired a lot
more of the June taxis than they expeoted or wanted, but bill purchases and re­
purchase agreements by the Federal helped bolster the market.... The crucial Fed­
eral funds rate has held generally below 4i%. a level which could arouse expecta­
tions of and trigger a sharp rise in money market rates....
i
'
The Treasury probably will need $4 billion to $5 billion of new cash - in­
cluding any participation certificates it can sell - by mid-December.... Rep. George
H. Mahon, D-Tex., chairman of the House Appropriations Committee, predicts the
House will reverse itself and agree with the Senate to authorize the full amount
of PC sales requested by the administration.... The debt managers probably will
rely on coupon issues for the balance of direct Treasury borrowing in 1967....
They may raise part of this cash in conjunction with the Nov. 15 refunding....




Yours very truly.

Washington Bureau

REPORTING ON GOVERNMENTS is published weekly.
Membership subscription $69 a year. Reproduction in whole
COPY

LBJ

LIBRARY

135 So. L a S a l l e S t r e e t
Chicago, III. 60603
S T a t e 2-9490
A.T.T. T e le ty p e 910-221-5640




T w enty B road S treet
N ew Y ork 5, N . Y .

W H ITEHA LL 3-1200
A.T.T. T e l e t y p e 710-5814508

In testimony before Congress and in speeches and comments on the economic outlook, a num­
ber of Fed officials have stated with eloquence and deep conviction their concern about currcnt
inflationary tendencies, their apprehension about the spreading inflationary psychology, and
their fear that these developments will intensify over the months ahead. Most of the financial
community shares these views. There is, therefore, a solid expectation in the credit markets
that the Fed must ultimately move away from its policy of credit ease. Yet the expectation is
almost as solid that the change is still well in the future.
There are many problems that confront the Fed in changing the easy money policy right
now. There is the distortion in the business figures due to the auto strike; the hope that some­
thing will be done about a tax increase or about Federal spending (and the danger that a credit
policy change might jeopardize such actions) ; the concern about the impact of a policy change
on savings flows and on our savings institutions; the fear that the housing industry would be
hurt; the recognition that a change here would have repercussions abroad and would probably
force an increase in the British bank rate; and the threat that a shift from an easy policy would
hinder the Treasury in financing the deficit. All of these—and there are others—make it hard
for the Fed to move and provide reasons and excuses to defer a difficult decision.
But barring a miracle in Viet Nam or elsewhere, they must be brushed aside or somehow
resolved, and the sooner the better from the standpoint of our long-range economic and finan­
cial stability. Some probing into a less easy monetary policy is needed at minimum if we are to
make a start in combating the notion, now gaining grassroots acceptance at an alarming pacc,
that inflation is guaranteed and that those who keep savings in fixed-income form rather than
in "growth" equities or in some quick-turn scheme are only misguided unfortunates who do
not understand what is being written on the financial wall. As the President is reported to have
said last week in discussing the need for a tax increase, “If you see a little fever developing,
you don’t want to wait until it gets 105° before you take the proper medicine”.

It is evident from the Fed Figures that such a policy shift has not yet been started, The mone­
tary authorities went out of their ivay late in the last statement week to supply reserves and to
maintain a level of free reserves in excess of $250 million. This has signaled to observers of
Fed activities that no change was made at the meeting of the Federal Open Market Committee
last Tuesday in the Fed’s policy of promoting monetary and credit expansion. Since the Treas­
ury will decide on the terms of its November refunding during the last week of October, the
Fed seems in effect to have elected to fight deflation, not inflation, at least through November
15.

•DNI 'OD

NOJLSNVT 'O A3H9J1V

1961 ‘6 » q o P O

COPY

LBJ

LIBRARY


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102